South African rand gained as Putin might skip BRICS summit

Reuters: The South African rand gained on Tuesday as analysts speculated the weekend’s aborted mutiny in Russia may mean President Vladimir Putin could skip BRICS summit where South Africa would in theory be obliged to arrest him.

SOUTH AFRICAN RAND GAINED

The BRICS group of emerging economies, comprising Brazil, Russia, India, China and South Africa, is due to hold a summit in Johannesburg in August. At 0815 GMT, the rand traded at 18.4800 against the dollar, about 1% stronger than its previous close. The International Criminal Court issued an arrest warrant in March for Putin, accusing him of the war crime of illegally deporting hundreds of children from Ukraine.

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Many South Africans were facing power cuts of around 10 hours a day until recently, but there have been some signs of improvement in the last few weeks as the country grapples with its worst power crisis on record. South Africa’s benchmark 2030 government bond also firmed, with the yield down 8 basis points to 10.525%. Statistics South Africa will at 0930 GMT publish first-quarter formal-sector employment figures.

U.S. DOLLAR

Reuters: The U.S. dollar was barely changed on Wednesday, with resilient economic data easing investor worries over a recession and lifting risk sentiment, though that also indicated that the Federal Reserve may have to continue raising rates. The Australian dollar fell sharply as consumer inflation eased in May. Data showed that U.S. consumer confidence increased in June to the highest level in nearly 1-1/2 years, while business spending appeared to hold up in May, indicating the economy remained on solid footing. Markets are pricing in a 77% probability of a 25 basis point hike by the Fed next month, according to CME FedWatch tool, but no more after that. Against a basket of currencies, the dollar rose 0.029% to 102.53, after slipping 0.24% overnight. The dollar index is on course to log a decline of about 1.5% for the month.

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Rodrigo Catril, senior currency strategist at National Australia Bank, said US data is feeding the theme of ‘sectoral recessions’ playing with different lags, making the Fed’s job to tame inflation harder. “Overall, the data is telling us the Fed needs to keep its foot on the tightening pedal.” Investor attention will firmly be on Fed Chair Jerome Powell’s comments at the European Central Bank Forum in Sintra, Portugal, which could provide cues on the path of interest rates. “We expect Powell to reaffirm his hawkish policy stance,” said Carol Kong, a currency strategist for Commonwealth Bank of Australia. “Though we doubt his comments will materially push up FOMC pricing.” Powell will be in a panel along with Bank of England’s Andrew Bailey, European Central Bank’s Christine Lagarde and Bank of Japan’s Kazuo Ueda.

Meanwhile, the Australian dollar fell 0.72% to $0.6637 after the Australian consumer price inflation rate slowed to a 13-month low in May, driven by a sharp pullback in fuel. A measure of core inflation also cooled, in a sign interest rates might not have to rise again in July. The kiwi was 0.47% lower against the dollar at $0.613. Elsewhere, the euro was down 0.1% at $1.0948, after rising 0.5% overnight following hawkish comments from ECB President Lagarde. Sterling was at $1.2734, down 0.09% on the day. The Japanese yen strengthened 0.16% to 143.81 per dollar, but remained close to the seven-month low of 144.18 it touched on Tuesday.

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Japanese authorities are under renewed pressure to combat the yen’s fresh declines driven by market expectations that the Bank of Japan will keep interest rates ultra-low, even as other central banks tighten monetary policy to curb inflation. “With the rise in the dollar against the yen set to run further, we judge the risk has increased the Ministry of Finance intervenes in the FX market by buying the JPY,” CBA’s Kong said. “However, we note it is the speed of change, rather than the level, that matters most in the MoF’s decision to intervene.”

BRITISH POUND

Reuters: The pound headed for its biggest daily gain against the dollar in two weeks on Tuesday, boosted by a modest return of risk appetite after an aborted mutiny by mercenaries in Russia at the weekend briefly threatened to upend markets. Investors are still trying to determine how Moscow will respond to the aborted uprising by the heavily armed Wagner Group over the weekend, bringing most of the focus back to the global economy and the outlook for interest rates, for now. Sterling was last up 0.14% against the dollar at , on course for its largest one-day rise since June 16. Against the euro , sterling was flat at 85.80 pence. The Bank of England raised rates on June 22 by 50 basis points to 5%, in light of evidence that the inflation of the last two years is becoming more entrenched in the economy and therefore harder to fight. The pound is closing in on a gain of 5.4% versus the dollar in the first six months of this year – which would mark its best first-half performance since 2017, when it rose 5.65%.

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Analysts say that at some point, higher interest rates and a cost-of-living crisis will take their toll on the UK economy, which will eventually weigh on the currency. “Interest rates are good for a currency as long as the economy is able to withstand those higher rates. The question is at what point will higher rates have more of an negative impact on growth in the UK? That will come, as we all know, with monetary policy tightening,” MUFG currency strategist Lee Hardman said. “The reality is the economy could prove more resilient than expected for maybe longer than people are anticipating, but eventually there will be signs of the economy cracking as those higher rates start to hit,” he said. Hardman added that sterling could get as high as $1.30-1.35 against the dollar before reversing as the economy becomes increasingly strained.

That said, the prospect of the BoE raising interest rates by a lot more than many had previously expected, and keeping them higher for longer, has encouraged flows of capital into sterling this year. Data from the Commodity Futures Trading Commission on Friday showed the largest increase in bets on sterling in over 18 months in the week to June 20, ahead of UK consumer price inflation figures and the BoE decision. Non-commercial net holdings – essentially speculators – hold a long pound position worth $3.7 billion, having added to their bullish holdings by a whopping 592% to a five-year high. “Almost certainly, the Monetary Policy Committee will raise rates again in August. The only question is whether it is by 0.25% or 0.5%, which will depend on the wage and inflation numbers released in the meantime,” Rupert Thompson, who is chief economist at asset manager Kingswood, said in a note on Monday.

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In terms of where rates peak, money markets show traders believe that figure to be around 6% by year-end, which would be the highest since January 2001, and that it will remain there for another six months. “Once again, this looks on the high side but this is said with some humility,” Thompson said.

GLOBAL MARKETS

Reuters: Asian shares stalled on Wednesday as surprisingly upbeat U.S. economic news warred with global growth concerns, while the embattled yen hit a 15-year low on the euro and Japan hinted at intervention to prevent further losses. The strength of U.S. data also combined with hawkish commentary from the European Central Bank to undermine bonds as markets narrowed the odds on further rate hikes. That only heightened attention on a star-studded panel of central bankers later in the day in Portugal which includes Federal Reserve Chair Jerome Powell, ECB head Christine Lagarde and Bank of Japan Governor Kazuo Ueda. “The U.S. data signals continued resilience in interest rate sensitive sectors, and the Fed is very clear that a period of sub-trend activity may be needed to bring inflation under control,” said analysts at ANZ. “So far, that doesn’t seem to be happening.” “For the ECB, senior officials signalled the need for ongoing tightening unless core inflation slows materially and a September rate hike is looking increasingly on the cards.”

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The rate risk kept markets cautious and MSCI’s broadest index of Asia-Pacific shares outside Japan was off 0.2%. Chinese blue chips dipped 0.6% and the yuan eased anew after Beijing fixed the currency lower than many had expected, sowing confusion about whether policy makers really wanted to slow its slide. Sentiment was not helped by a Wall Street Journal report that Washington was considering new restrictions on exports of artificial intelligence chips to China. The report knocked Nvidia 3% lower after the bell and dragged Nasdaq futures down 0.4%. Yet it seemed to be welcome news for Japan’s tech companies, which drove a 1.5% rally in the Nikkei. Chip groups Tokyo Electron and Advantest led the gains. EUROSTOXX 50 futures added 0.3% and FTSE futures 0.2%.

S&P 500 futures dipped 0.2%, though that followed solid gains on Tuesday as U.S. data on housing, durable goods orders and consumer sentiment handily topped expectations. “The data indicated a firmer pace of residential, inventory, and equipment investment in the second quarter,” wrote analysts at Goldman Sachs. “We boosted our Q2 GDP tracking estimate by 0.4pp to +2.2%.” That resilience offset recent softness in manufacturing surveys and led the market to narrow the odds on a July rate hike from the Federal Reserve. Futures now imply around a 77% chance of a hike to 5.25-5.5%, and slightly more risk of a further move to 5.5-5.75%, which nudged short-term Treasury yields higher.

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Bond yields also moved sharply higher in Europe after a bevy of central bankers sounded hawkish on inflation and warned rates would likely have to stay higher for longer. Markets imply a 90% probability of an ECB rate hike to 3.75% in July and a peak around 4.0%. That underpinned the euro at $1.0950 , while keeping it near a 15-year peak of 157.97 yen. The dollar had hit a near eight-month top of 144.18 yen , before easing back to 143.96 as Japanese officials again protested against the yen’s weakness. Japan’s top currency diplomat Masato Kanda on Wednesday warned against further falls in the yen, saying authorities would take an appropriate response if moves became excessive. Markets are wary in case Japan intervenes to buy the yen as it did last October, which knocked the dollar down from a top of 151.94 to as low as 144.50 in a matter of hours.

Yet, a rally in the yen looks unlikely while the Bank of Japan maintains its super-easy monetary policy. “Following BOJ Governor Ueda’s consistently dovish message and weak Japanese wage growth, market participants now lack the conviction the BOJ will soon tighten its monetary policy,” said Carol Kong, a currency strategist at CBA. “So we now see a higher risk Japanese authorities will step into the market to prop up the JPY.” In commodities, gold steadied at $1,915 an ounce , after finding support at the recent three-month low of $1,909.99. Oil prices edged up after data showed a larger-than-expected draw in U.S. crude and gasoline inventories, but remains uncomfortably close to its lows for the year so far. Brent firmed 33 cents to $72.59 a barrel, while U.S. crude rose 20 cents to $67.90.