South African rand firmed after China’s chip material export curbs

Reuters: The South African rand firmed against the dollar on Tuesday in thin trading amid signs China’s decision to impose export measures on some metals used by the semiconductor industry could help the ailing currency.

SOUTH AFRICAN RAND FIRMED

Trading was relatively subdued due to a U.S. holiday and lack of local economic data points. China said on Monday it would impose restrictions from Aug. 1 on exports of some gallium and germanium products, metals used in computer chips and other products, to protect national security interests.

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DailyFX analyst Warren Venketas said the risk-sensitive rand stood to benefit from China’s move, with demand set to soar for the minerals, which are also produced in South Africa. “These two little known substances could have major upside for the local currency as South Africa is one of the biggest germanium producers globally and gallium is produced in aluminum production a capability South Africa holds,” Venketas said.

At 1502 GMT, the rand traded at 18.6300 against the dollar, around 0.9% stronger than its previous close. The dollar last traded at 102.940, around 0.02% weaker, against a basket of global currencies. Bigger moves could come when the U.S. Federal Reserve releases its June meeting minutes on Wednesday, analysts at ETM said. Shares on the Johannesburg Exchange were little changed, with both the broader all-share index and the Top-40 chip index closing near their previous levels. South Africa’s benchmark 2030 government bond was weaker, with the yield up 3 basis points to 10.540%.

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U.S. DOLLAR

Reuters: The dollar fell slightly against the yen on Tuesday as markets remained on high alert for signs of Japanese intervention, while the Australian dollar gained after the country’s central bank held interest rates steady. The greenback was down 0.19% by 0833 GMT to 144.45 yen , after rising 0.27% on Monday. However, the yen remained close to last week’s almost eight-month low of 145.07 per dollar, which prompted Japan’s Finance Minister Shunichi Suzuki to warn against excessive yen selling. The Reserve Bank of Australia held interest rates steady at 4.10% on Tuesday, saying it wanted more time to assess the impact of past hikes, but warned further tightening might be needed to bring inflation to heel. The Australian dollar bounced around, but was up 0.13% at 0833 GMT to $0.668.

Markets had leant towards the central bank holding rates steady after inflation eased a little more than expected in May. Economists however were split, with 16 out of 31 polled by Reuters expecting a hike and the rest forecasting the bank would maintain current rates. Market activity was relatively subdued on Tuesday with U.S. trade closed for the July 4 public holiday. Investors were also waiting for the closely watched U.S. non-farm payrolls employment report due on Friday, which is likely to influence the Federal Reserve’s next decision. The euro was down 0.13% against the dollar at $1.09, while sterling was roughly flat at $1.269.

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The U.S. dollar index, which tracks the greenback against six major peers, was also little changed at 103. “It feels like every week will bring something and this week we’re waiting for the U.S. non-farm payrolls,” said Alvin Tan, head of Asia FX strategy at RBC Capital Markets. Across currency markets, investors also remained on watch for possible intervention by Japanese authorities to stem yen losses. Earlier on Tuesday, Japan’s top financial diplomat Masato Kanda said that officials were in close contact with U.S. Treasury Secretary Janet Yellen and other overseas authorities almost everyday on currencies and broader financial markets. “This is sending signals that a coordinated intervention may be coming as yen continues to hover above 144 per dollar,” said Charu Chanana, market strategist at Saxo Markets. “A coordinated intervention usually has a longer lasting impact on the yen than a unilateral intervention would have.”

Japan bought yen in September, its first foray into the market to boost its currency since 1998, as the Bank of Japan’s pledge to retain ultra-loose policy as long as required drove the yen as low as 145 per dollar. It intervened again in October after the yen plunged to a 32-year low of 151.94. RBC’s Tan said he thinks the dollar is likely to rise past 150 yen. “The Bank of Japan is still unwilling yet to move away from the YCC policy, that’s going to result in a higher dollar,” he said, referring to Japan’s yield curve control that keeps bond market rates low. Tan said such a move would make intervention “more likely than not”.

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GLOBAL MARKETS

Reuters: Asian shares fell on Wednesday after a slowdown in China’s services activity dented sentiment and as markets turned their focus to the release of Federal Reserve minutes and a key U.S. jobs report later in the week. Market conditions were subdued following the Independence Day public holiday on Wall Street on Tuesday. S&P 500 futures dipped 0.1% and Nasdaq futures fell 0.2%. MSCI’s broadest index of Asia-Pacific shares outside Japan skidded 0.7%. Japan’s Nikkei also fell 0.4%, marking the second straight session of declines after climbing to fresh three-decade highs. Australia’s resources heavy shares fell 0.2% after the Reserve Bank of Australia held rates steady on Tuesday but warned of more tightening ahead.

In China, a survey showed the expansion in the services sector continued to slow in June, adding to signs that the country’s post-COVID recovery is losing steam. Chinese blue chips fell 0.5% and Hong Kong’s Hang Seng index slumped 1.3%. “While it may feel like China has taken two steps back, the next move could be three forward,” said Andrew McCaffery, global chief investment officer at Fidelity International, adding that Chinese shares are trading at a significant discount. “This may feel slightly contrarian at present, but it is an attractive entry point, especially as there are some signs of stabilisation in the US/China relationship.”

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U.S. Secretary of Treasury Janet Yellen will visit China later this week, but escalating tensions in the tech space, with Beijing restricting exports of two metals and Washington reportedly banning Chinese firms from accessing cloud computing, weighed on broader sentiment. However, shares of some Chinese makers of products used to make chips rallied as supply concerns sent prices of the metals higher. Traders are now looking ahead to the release of the minutes of the Fed’s last policy meeting later on Wednesday and the non-farm payrolls report on Friday.

Markets are almost certain that the Fed will hike in July after pausing last month. Economists polled by Reuters expect the United States added 225,000 jobs last month, slowing from 339,000 job gains in the prior month, and average earnings likely held steady at a monthly 0.3% growth. Chris Weston, head of research at Pepperstone, said it was just a month ago that the market wanted to see a cooling job market for signs that the Fed’s rate hikes are working. “It now seems the thesis has evolved, and the market wants to see strong job creation, conditional on subdued wage growth.”

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In the currency markets, moves are largely muted. The yen was little changed at 144.53 per dollar, slightly away from 145.07, which was its weakest in eight months. The Australian dollar slid to $0.6682, after a whipsaw session that saw it recover all of the losses from the RBA’s pause and test key resistance of $0.6696. Short-term Treasury yields eased 4 basis points to 4.9044% while 10-year yields were little changed at 3.8467%. Oil prices gave up some of their gains on Wednesday after advancing on supply concerns stemming from production cuts by top producers Saudi Arabia and Russia. Brent crude futures fell 0.6% to $75.78 a barrel after climbing 2.1% overnight.

BRITISH POUND

Reuters: Sterling steadied on Tuesday as traders waited for service sector data due on Wednesday and pondered whether any positive impact from expected higher interest rates on the British currency has run its course. In trading thinned by a bank holiday in the U.S., sterling edged 0.08% higher against the dollar at $1.2701 by 0930 GMT, 1.2% below the 14-month high it touched against the dollar last month. Against the euro , the pound rose 0.16% to 85.84 pence, moving towards a 10-month high touched against the single currency last month.

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Amid fears that more expected rate hikes by the Bank of England could slow the British economy further, traders are awaiting PMI service data due on Wednesday to gauge business sentiment. “While a modest uptick in yesterday’s manufacturing PMI may have moderated the real-economy headwind, the key variable for UK macro activity remains services sentiment,” said Jeremy Stretch, head of G10 FX strategy at CIBC. “Any signs of a correction in tomorrow’s final services PMI, risks dragging on sterling sentiment and positioning,”

Stretch said. A survey showed on Monday that the pace of decline in Britain’s manufacturing sector steepened in June and optimism faded despite weakening price pressures. The S&P Global/CIPS UK Manufacturing Purchasing Managers’ Index fell to 46.5 from 47.1 in May, its lowest reading this year and one of the weakest since the 2008-09 financial crisis, but was revised up from an earlier preliminary “flash” reading of 46.2. The BoE is watching economic indicators closely as it judges how many more interest rate hikes are needed to control Britain’s rate of inflation.

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The central bank raised interest rates by half a point two weeks ago to 5%, and markets expect it to deliver an identical increase when it meets on Aug. 3. Money markets are pricing in that BoE rates will peak only in March 2024 at 6.28%. A month ago, the expectation was for a peak around 5.3% by the end of this year, with the first rate cut following a few months later. Traders now expect no rate cuts until May next year. For now, said Jane Foley, head of FX strategy at Rabobank, “sterling is set to lack fresh direction given the absence of major UK data releases and in light of the U.S. holiday.” “That said, we maintain the view that positioning in the GBP has been looking stretched and that cable could struggle to surpass recent highs,” Foley added.