Dollar index lower as the rand falls another 1%

Reuters: The dollar index was lower on Friday following two straight days of gains, after economic data showed a cooling in consumer spending, raising some doubt about the potential aggressiveness of the Federal Reserve in fighting inflation. U.S.

U.S. DOLLAR INDEX WAS LOWER ON FRIDAY

Treasury yields were also mostly lower after the data. The Commerce Department said consumer spending ticked up 0.1% in May while data for the prior month was revised to show spending accelerated by 0.6% versus the previously reported 0.8%. The personal consumption expenditures gained 0.1% for the month after an 0.4% rise in April while advancing 3.8% on an annual basis, slowing from a revised 4.3% the prior month. But the PCE gauges were still well above the Fed’s 2% inflation target.

“Spending was weak, especially in inflation-adjusted terms. Goods spending fell and even services spending looks to be sputtering,” said Brian Jacobsen, chief economist at Annex Wealth Management in Menomonee Falls, Wisconsin. “Inflation is drifting lower. The off-ramp to 2% inflation is a long one, though.” The dollar index fell 0.426% to 102.880 and was virtually unchanged on the week. The index had risen 0.82% over the prior two sessions after comments from Fed Chair Jerome Powell and solid economic data heightened market expectations the U.S. central bank would raise interest rates two more times this year, while reducing the belief that a rate cut could be in the cards by the end of the year.

ALSO READ: Who is the richest person in the world today? Top 10 list – 3 July 2023

Expectations for a 25 basis points hike at the Fed’s July meeting dipped slightly, with markets now pricing in an 84.3% chance of a hike, down slightly from the 89.3% on Thursday, according to CME’s FedWatch Tool. Chicago Federal Reserve Bank President Austan Goolsbee said Fed officials will be parsing “a lot of data” leading up to the Fed’s next meeting to assess whether borrowing costs need to be pushed up higher to tamp down inflation. The dollar index is up 0.3% for the quarter and is poised to snap a streak of back-to-back quarterly declines. For the first half, the greenback is off 0.6%. The Japanese yen strengthened 0.35% and was on track to snap a three-day run of weakening against the greenback at 144.26 per dollar, after briefly crossing the 145 mark with a fresh seven-month high of 145.07.

Investors have been watching to see whether the Bank of Japan will intervene in the currency again, which last happened at around the 145 mark, as U.S. and Japanese central bank policy plans are likely to remain counter to each other. The greenback is up nearly 9% for the quarter against the yen, which would mark its strongest in a year. Japan’s Finance Minister Shunichi Suzuki on Friday warned the country will take the appropriate steps should the yen continue to weaken, and warned against investors selling the yen too far, echoing similar comments from other government ministers and officials this week. Earlier data showed core inflation in Tokyo ticked higher in June and remained above the BOJ’s 2% target for the 13th month, keeping pressure on bank policymakers to scale back their ultra-easy monetary policy.

ALSO READ: Which parts of Metrorail are still closed?

In contrast, euro zone inflation data fell for a third consecutive month, but showed a small drop in underlying inflation and was unlikely to keep the European Central Bank from hiking rates at its July meeting. The euro was up 0.43% at $1.0911 while Sterling was last trading at $1.2695, up 0.66% on the day. Data showed Britain’s economy grew by just 0.1% in the first quarter, as inflation sapped disposable income in households.

SOUTH AFRICAN RAND

Reuters: The South African rand fell 1% on Friday, ending a turbulent month ahead of budget and trade figures later in the day. At 0958 GMT, the rand traded at 18.9600 against the dollar, 1% weaker than its previous close. The dollar last traded at 103.440, about 0.1% stronger against a basket of global currencies. “After kicking off the week on the front foot, the rand has come under notable selling pressure, with the market, by and large, taking direction from external developments,” said Kieran Siney of ETM Analytics. The rand slipped in the second half of the week after comments by Federal Reserve Chairman Jerome Powell on Wednesday alluded to further interest rate hikes to tackle inflation, giving the dollar a boost.

ALSO READ: Who are the richest South Africans in the world today? – 3 July 2023

However, the rand has still appreciated by more than 4% against the dollar since the start of June, making it the second-best-performing emerging market currency this month, Siney said. “The Rand did fairly well compared to its EM peers in the past two weeks and a period of consolidation was warranted,” said Andre Botha of TreasuryONE. Earlier on Friday, central bank data showed South African private sector credit grew 6.85% year on year in May, while money supply increased 10.30% over the same period. Monthly budget and trade balances for May are due to be released around 1200 GMT.

Analysts polled by Reuters predict a trade surplus of 6 billion rand ($316 million) in May, higher than April’s 3.54 billion rand surplus. On the Johannesburg Stock Exchange, both the blue-chip Top-40 and the broader all-share indices were trading more than 1% higher. South Africa’s benchmark 2030 government bond was weaker, with the yield up 7.5 basis points to 10.570%.

ALSO READ: Zulu King undergoes medical exams amid poisoning suspicions

BRITISH POUND

Reuters: The pound rose on Friday, boosted by higher UK bond yields and a fall in the dollar on signs that U.S. inflation is decelerating. U.S. personal consumption expenditures inflation – the Federal Reserve’s preferred gauge of price pressures – slowed to 3.8% year-on-year in May, compared to 4.3% in April. Meanwhile core PCE inflation, which strips out volatile food and energy prices, also cooled in May. Economists expected it to stay at 4.7%, but it slipped to 4.6%. Sterling was last up 0.55% at $1.268, and was set for a monthly gain of 1.9%. The U.S. inflation data caused the dollar to fall slightly, helping the pound rise from the $1.266 level it stood at before the figures were released.

The dollar index – which tracks the currency against six major peers – was last down 0.19% at 103.13, reversing earlier gains. UK bond yields have jumped in June as data has shown that Britain’s inflation problem is more deeply entrenched than elsewhere, pushing the Bank of England to hike interest rates by an outsized 50 basis points last week. Higher yields tend to boost a country’s currency by making fixed income investments there look more attractive. That dynamic was in play again on Friday, said Lee Hardman, currency analyst at lender MUFG. The euro was last down 0.34% against the pound, at 85.85 pence, compared to 85.86 pence before the U.S. data. It was set for a 0.1% monthly fall, after sliding almost 2% versus the pound in May.

ALSO READ: First female tax ombud appointed in South Africa

“Probably it’s the usual driver in terms of UK yields are moving higher again today, more so than elsewhere,” Hardman said. Yields on the UK’s two-year bond yield were up about 5 bps on Friday to 5.27%, while those on U.S. and German bonds were roughly flat. The two-year yield, which is particularly sensitive to interest rate expectations, has jumped by just under a percentage point in June. That’s the biggest rise since the chaos unleashed by the UK’s fiscal announcement in September. The Bank of England raised interest rates to 5% last week but traders who bet on the future path of borrowing costs think they’re likely to rise to around 6.2% by early next year. Economists recently polled by Reuters think a 5.5% peak is more likely. Sterling is up 4.9% against the dollar this year, but plenty of analysts have started to question whether those gains can continue if high interest rates start to weigh on growth.

GLOBAL MARKETS

Reuters: Asian shares firmed on Monday as demand for tech stocks buoyed Japan’s market, while a data-packed week promises to be pivotal to the outlook for the Chinese economy and U.S. interest rates. China’s factory activity slowed in June as the Caixin manufacturing survey showed a dip to 50.5, from 50.9 in May. That slightly beat market forecasts of 50.2, but still underlined the weakening trend seen in other surveys. China’s central bank has promised more “forceful” action to support the economy and looks likely to soon get a new boss. Something major is needed given Chinese blue chips shed 5% last quarter while much of the developed world rallied. “As Japan found in the 1990s, it’s hard work stimulating an economy experiencing a significant property slump against a backdrop of high sector debt and a falling population,” cautioned analysts at ANZ in a note.

ALSO READ: US Supreme Court bans the use of race in university admissions

In contrast, hopes Japanese firms will fill any gaps created by Sino-U.S. decoupling combined with a weak yen to lift the Nikkei almost 20% last quarter. The index climbed another 1.7% on Monday to within a whisker of 30-year peaks. A survey from the Bank of Japan showed business sentiment improved in the second quarter as easing supply constraints and the removal of pandemic curbs lifted factory output and demand. MSCI’s broadest index of Asia-Pacific shares outside Japan gained 1.2%, though it was still lagging far behind Japan’s market. EUROSTOXX 50 futures and FTSE futures both added 0.4%. S&P 500 futures and Nasdaq futures were steady ahead of the July 4 holiday, having gained more than 6% in June. The high-flying tech sector could get another boost from news Tesla delivered a record 466,000 vehicles in the second quarter, topping market estimates of around 445,000. That followed Apple’s crossing above $3 trillion in valuation for the first time on Friday and sealing the Nasdaq’s best quarter in 40 years.

Analysts at BofA noted the market value of the seven biggest tech stocks had ballooned by $4.1 trillion so far this year, while Apple, Microsoft and Alphabet combined were worth more than the entire emerging market. Sentiment had been soothed on Friday by a modest downward surprise in U.S. inflation while a flat reading for consumer spending suggested the Federal Reserve’s rate hikes were having an impact, albeit gradually. Debt markets, however, still imply around an 87% chance of the Fed hiking to 5.25-5.5% this month, and a 40% probability of yet a further rise by November. Minutes of the Fed’s last policy meeting are out on Wednesday and will expand on why they decided to pause, though most policy makers also expected to hike at least two more times by year end. Important U.S. data this week includes closely watched surveys on manufacturing and services, job openings and the June payrolls report. Median forecasts are for a steady unemployment rate, while jobs are seen up 225,000 after May’s surprisingly strong 339,000.

ALSO READ: UK government to appeal judges’ block of Rwanda deportation plan

Michael Feroli, an economist at JPMorgan, said that wouldn’t be nearly enough for the Fed to stand down from the recent rhetoric pointing to further tightening. “While we see a strong case for a July hike, we still believe the two subsequent payroll reports prior to the meeting in September will show enough slowing to allow the Fed to more comfortably go on extended hold.” The prospect of at least one more U.S. rate rise continues to underpin the dollar against the yen, given the Bank of Japan shows little sign of abandoning its super-easy policies. The dollar stood at 144.48 yen on Monday, after hitting an eight-month peak of 145.07 last week before the risk of Japanese intervention slowed its ascent. The euro was likewise firm at 157.61 yen , and just off its recent 15-year top of 158.01. The single currency was range-bound on the dollar at $1.0915 , having spent the entire year so far trading between $1.0635 and $1.1096.

Rising interest rates globally have seen gold struggle recently and the metal was last at $1,920 an ounce , near last week’s three-month low at $1,892. Oil prices marked time as investors waited to see the impact of another round of output cuts by Saudi Arabia. Brent rose 6 cents to $75.47 a barrel, while U.S. crude firmed 2 cents to $70.66.

ALSO READ: Botswana secures last-minute deal with De Beers

Published by the Mercury Team on 3 July 2023