South African rand firms after recovering from 3-year low

Reuters: Sterling ticked higher against a softer dollar and euro on Thursday, although traders were still focused on the global backdrop after expectations rose this week for bigger interest rate hikes from the U.S Federal Reserve.

BRITISH POUND

By 11:58 GMT, the pound was up 0.42% against the dollar at $1.1887 and 0.1% higher against the euro at 88.892 pence. Nevertheless, the pound is down 1.3% against the dollar for the week as rate-hike expectations from the Fed have ticked up. “It has been a big week for the dollar and U.S. interest rates, that is the dominant story this week. We had Powell’s testimony on Tuesday and Wednesday and U.S. jobs data tomorrow,” ING strategist Chris Turner said.

Looking at the UK, Turner pointed to key data in the coming weeks before the Bank of England convenes on March 23 for its next policy meeting. UK employment and wage data will be published on March 14. Next week will also see British finance minister Jeremy Hunt announce his new budget. “There have been signs in the Bank of England’s Decision Maker Panel’…that tightness in the labour market is easing,” said Turner. “Any sign of further easing in either wages or CPI numbers number would be a negative event risk for sterling – and vice versa,” said Turner. The market is pricing in a 91% chance of a 25-basis point rate hike when the BoE meets on March 23 for its next policy meeting, with an outside chance of no change.

“They haven’t quite kept up pace with what’s happening on the other side of the Atlantic. That’s one of the reasons sterling is a bit lower against the dollar (this week),” said Turner. Next week’s British budget will include closely watched growth forecasts for hints over the outlook for the UK economy. On Wednesday, the British Chambers of Commerce forecast that the country’s economy is on track to shrink less than expected this year and avoid two consecutive quarters of contraction, the technical definition of a recession.

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US DOLLAR

Reuters: The dollar paused its ascent on Friday after a rise in jobless claims in the United States implied possibly easing conditions in the labour market and tempered expectations of further aggressive rate hikes from the Federal Reserve. In Asia, moves were subdued as markets remained on guard ahead of the Bank of Japan’s (BOJ) monetary policy decision at the conclusion of a policy meeting, the last to be chaired by incumbent BOJ Governor Haruhiko Kuroda before he steps down in April. The yen held steady in early Asia trade, and was last 0.2% higher at 135.89 per dollar, retreating from a nearly three-month low hit earlier in the week. The BOJ is widely expected to maintain ultra-low interest rates on Friday and refrain from major changes to its controversial bond-yield control policy, leaving options open ahead of a leadership transition in April. “In theory, it should be a non-event, but there is a non-zero chance that Kuroda goes out with a bang and alters yield curve control,” said Chris Weston, head of research at Pepperstone.

The yen has come under downward pressure again in recent weeks as the BOJ has remained ultra dovish, while interest rate expectations in the United States have ramped up. That has caused the yen to weaken from January highs, and reversing a rally that followed a surprise tweak to yield curve control by the BOJ in December. Elsewhere, the U.S. dollar slipped marginally on Friday. The euro rose 0.13% to $1.0595, while sterling edged 0.05% higher to $1.1932, both some distance from multi-month lows hit on Wednesday. The kiwi gained 0.07% to $0.6106, but the Aussie slipped 0.13% to $0.6582. Data released on Thursday showed that the number of Americans filing new claims for unemployment benefits increased by the most in five months last week, though the underlying trend remained consistent with a tight labor market.

Nonetheless, the jump in jobless claims was enough to cause traders to unwind some bets that U.S. rates would rise much higher than previously expected. Futures pricing now implies a roughly 54% chance that the Fed will raise rates by 50 basis points this month, compared with 70% before the data release. The Fed funds rate is projected to peak just below 5.5% by July. Against a basket of currencies, the U.S. dollar index fell 0.12% to 105.12 but remained on track for a weekly gain of nearly 0.6%. It surged earlier in the week after Fed Chair Jerome Powell struck a more hawkish tone than markets had expected at his semi-annual testimony before the Senate Banking Committee. Focus now turns to the closely watched nonfarm payrolls report due later on Friday, the next major data point that could offer clues on the Fed’s next steps for monetary policy.

According to a Reuters survey of economists, nonfarm payrolls likely increased by 205,000 jobs in February after surging by 517,000 in January. “The payrolls report has surprised us on the high side for, I think, about 10 straight months now, so it’s been a sign of real strength for the U.S. economy,” said Jarrod Kerr, chief economist at Kiwibank. “It is a little frustrating for the Fed. They’ve obviously tightened a lot, hoping it’ll have an effect. But we’ve seen bounce back in a lot of activities indicators in recent months. So it looks like the job’s not done.”

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SOUTH AFRICAN RAND

Reuters: The South African rand strengthened on Thursday, recovering from an almost three-year low hit the day before when S&P Global downgraded South Africa’s outlook to “stable” from “positive”. At 15:45 GMT, the rand traded at 18.5700 to the dollar, 0.34% stronger than its previous close. On Wednesday it hit 18.7200, its weakest in almost three years. The dollar was down about 0.4% against a basket of major currencies, after reaching a 2023 high on Wednesday following hawkish comments by U.S. Federal Reserve Chair Jerome Powell. Global investors will now be looking at U.S. jobs data due on Friday for confirmation that a strong labour market supports more interest rate increases.

“After January’s stellar jobs numbers, tomorrow’s release could either add to the hawkish rhetoric or not. Anything in line or above forecasts could add to the rand’s woes possibly surpassing yesterday’s high (for the dollar) of 18.72,” said IG analyst Warren Venketas. Shares on the Johannesburg Stock Exchange were little changed, with the Top-40 index down 0.03% and the broader all-share index closing 0.1% lower. Analysts said the markets had already priced in S&P’s downgrade.

The downgrade followed disappointing gross domestic product data released earlier this week, which showed South Africa’s economy contracted more than expected in the last quarter of 2022 and could be on track for a recession if it shrinks again this quarter. The government’s benchmark 2030 bond was weaker, with the yield up 3 basis points to 10.195%.

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GLOBAL MARKETS

Reuters: Falling bank stocks drove Asian markets lower on Friday, while bonds rallied and expectations for U.S. interest rate rises were reduced after a surprise capital raising at a Silicon Valley startup lender unleashed fears of broader banking-system stress. MSCI’s broadest index of Asia-Pacific shares outside Japan fell 1.3% to a two-month low, with banks and Hong Kong tech stocks leading losses, while London and European futures each slid more than 1%. Japan’s Nikkei lost 1.3% and S&P 500 futures were down 0.4% in early trade following the cash index dropping 1.8% and falling below its 200-day moving average. The U.S. dollar rose and short-end Treasuries extended sharp overnight gains – driving two-year yields down another nine basis points to 4.8068%. Fed funds futures also rallied strongly, pulling the market-implied peak in U.S. rates from above 5.6% to just below 5.5%, and pricing about a 50% chance of a 50 basis point Fed hike this month, down from more than 70% a day earlier.

The moves followed SVB Financial Group, parent of startup-lender Silicon Valley Bank, noting higher-than-expected “cash burn” from clients, falling deposits and rising costs of capital. It announced an equity sale hours after crypto-focused lender Silvergate said it was closing down. SVB stock was still sliding after the bell and has lost about 70% of its value in 24 hours. Titans’ shares were dragged down with it, with J.P. Morgan Chase & Co losing 5.4%, Citigroup down 4.1% and big lenders in Asia and Australia on the slide – albeit to a lesser extent – on Friday morning. “I think there’s speculation that there are wider problems within the U.S. banking system, or there’s that potential, and that’s caused a re-think of Fed policy,” said ING economist Rob Carnell in Singapore. “The thinking is that if what the Fed’s doing is causing this distress, then perhaps they won’t be doing that much more,” he said. “But it’s a big move on the back of what seems to be some fairly woolly speculation…which just shows how antsy the markets are right now, and this has spilled into all the other markets.”

Adding to the nerves, traders were wound up ahead of a Bank of Japan (BOJ) meeting on Friday – Governor Haruhiko Kuroda’s last one in charge – and U.S. jobs data due later in the day that is likely to set the tone for the U.S. rates outlook. The BOJ is likely to maintain ultra-low interest rates and hold off on major changes to its yield control policy, leaving options open ahead of a leadership transition in April. But since long-dormant Japanese inflation has gathered pace, and following a surprise relaxation of a cap on 10-year yields in December, speculation of changes is rife and has dollar/yen volatility gauges spiking. The yen nudged a little higher to 135.86 prior to the BOJ policy announcement. Ten-year Japanese government bond futures tracked global bonds higher in morning trade and ten-year cash bonds yielded 0.495%, just below the 0.5% cap.

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Elsewhere surprisingly high U.S. jobless claims have offered a weak entree for the broader U.S. employment data due later on Friday, putting some pressure on recent dollar gains. The figures loom as a crucial barometer of the health of the U.S. labour market and the direction of interest rates after Fed Chair Jerome Powell warned rates could rise further and faster if data shows that is needed to get a grip on inflation. The euro held modest overnight gains at $1.0594. Bitcoin was nursing losses just above the psychological $20,000 level as the fallout from the demise of Silvergate weighs on the broader mood in digital assets. Brent crude futures were pinned at $81.55 a barrel and gold at $1,831 an ounce.

Published by the Mercury Team on 10 March 2023

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