South African Rand was flat: Dollar scales 2023 top on yen

Reuters: The South African rand was flat on Friday, after former president Jacob Zuma avoided being returned to jail thanks to a reduction in his sentence approved by the current president, a move that eliminated a scenario that could have hit businesses.

SOUTH AFRICAN RAND WAS FLAT ON FRIDAY

There were fears there could be violent protests if Zuma had been ordered to serve more time in prison following a court ruling that his release on medical parole in September 2021 was unlawful. After Zuma was taken into custody for contempt of court in July 2021 more than 300 people were killed in riots.

The remission approved by President Cyril Ramaphosa appears to have made moot a decision by the country’s top prisons official on whether Zuma should go back to jail. At 1502 GMT, the rand traded at 18.8775 against the dollar, same as its previous close. The rand has been volatile in recent weeks, hitting an all-time low on June 1 before recovering strongly by the end of July. But since the start of August it is down more than 5% against the dollar.

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Rand Merchant Bank said in a morning briefing that although there were signs of rand stability it was “way too early, to be convinced of a return to normality”. On the Johannesburg Stock Exchange, the Top-40 index closed down about 1.1%. South Africa’s benchmark 2030 government bond was weaker, the yield up 4.5 basis points to 10.165%.

U.S. DOLLAR

Reuters: The dollar rose on Friday after a slightly bigger increase in U.S. producer prices in July lifted Treasury yields higher even as speculation grows that the Federal Reserve is at the end of hiking interest rates. Rebounding cost of services at the fastest pace in nearly a year pushed the Producer Price Index higher and unsettled traders who also saw the yen cross the 145-for-$1 threshold that triggered Japanese intervention in September 2022. The PPI for final demand rose 0.3%, the Labor Department said, as data for June was revised lower to show the PPI unchanged, instead of rising by a previously reported 0.1%. In the 12 months through July, the PPI rose 0.8% after a 0.2% gain the prior month. The PPI was forecast to climb 0.2% on the month and advance 0.7% year-over-year, a Reuters poll of economists showed.

The PPI for services increased 0.5%, the biggest gain since last August, because it contains the volatile retailer and wholesaler margins component, said Thierry Wizman, global FX and currencies strategist at Macquarie in New York. The market also has worried that rising energy costs will push up the consumer price index, but it’s misplaced as PPI for energy was 0.0% on the month, Wizman said. “Everyone’s concerned now about headline CPI being high because of energy prices, but you can’t really get overly worked up about that if PPI final demand is 0.8%, right?”

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The CPI data on Thursday showed consumer inflation rose 0.2% last month, matching the gain in June, and by 3.2% in the 12 months through July. The dollar index , a measure of the greenback against six peers, rose 0.21% as it headed to a fourth straight week of gains, up about 2.9% after bouncing off a 15-month low in mid-July on signs of a resilient U.S. labor market. Data since then has pointed to a decelerating pace of inflation, raising bets the Fed won’t hike rates any further. But after the Treasury raised its borrowing estimate for the third quarter, yields have moved higher.

The inflation data is encouraging but achieving a sustainable Fed inflation target of 2% requires a less robust labor market, said Marvin Loh, senior global macro strategist at State Street in Boston. “The job won’t be done until we get these CPI prints that are stable around 2% and we get a jobs market that’s considered balanced,” Loh said. Meanwhile, the dollar “probably found a range.” Futures traders now see an 88.5% likelihood that the Fed leaves its benchmark interest rate at its current range of 5.25-5.5% when policymakers meet in September. Prior to the inflation data, that chance was already above 85%.

The stronger dollar led the yen to briefly touch 145.03 in late afternoon trade, its highest since June 30. The dollar was last at 144.95 yen, up 0.15% on the day. “You should expect the rhetoric once yen gets to 145,” said Bank of Singapore currency strategist Moh Siong Sim. “I think the market will get a lot more careful as we get to that level.” Japan intervened in currency markets last September when the dollar rose past 145 yen, which prompted the Finance Ministry to buy the yen and push the pair back to around 140 yen. The yen is down more than 10% against the dollar for the year.

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Meanwhile, sterling rose for the first time in four days after data showed the British economy grew more than expected in June, allaying some concern about the impact of high inflation and high rates on activity. The pound was last trading at $1.2694, up 0.15% on the day, but was still heading for a fourth weekly drop. Elsewhere on Friday the euro slid 0.3% to $1.0946 and the dollar fell 0.06% against the Swiss franc .

BRITISH POUND

Reuters: The pound broke three straight days of losses on Friday after data showed the British economy grew more than expected in June, which boosted sterling slightly against the dollar and the euro. British economic output grew by 0.5% in June, figures from the Office for National Statistics showed on Friday, above expectations in a Reuters poll of economists which had forecast growth of 0.2%. Britain, however, remains the only big advanced economy yet to regain its pre-COVID, late-2019 level. The stronger than expected showing helped to justify bets that the Bank of England will keep on raising interest rates, given the central bank stressed this month that resilience in the economy was one of the factors that would underpin its judgement.

Sterling was last up 0.24% against the dollar at $1.2707, a touch higher than before the data and outperforming other G10 currencies, but was still on course for a fourth consecutive weekly loss. The euro fell against the pound, dropping 0.1% on the day to 86.50 pence. “The data was very strong, there is no other way to put it. I think the relatively muted market reaction is maybe because the markets are taking the scale of outperformance in manufacturing activity in June as a one off,” said Derek Halpenny, head of research global markets EMEA at MUFG.

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The data showed that in the second quarter the manufacturing sector had its best quarter since early 2019, excluding the initial rebound from the first COVID-19 lockdown in 2020. Attention now turns to the next batch of UK numbers due next week – inflation data as well as wages and jobs. “Now if there’s even a slight upward bias in the print next week relative to expectations that will obviously confirm more tightening to come,” said Halpenny. Current market pricing roughly indicates expectations of two more Bank of England rate rises in this cycle. In comparison, the Federal Reserve, and potentially also the European Central Bank, are seen as having finished raising rates.

GLOBAL MARKETS

Reuters: Asian shares slid on Monday as China’s property woes amplified the case for serious stimulus even as Beijing seems deaf to the calls, while rising Treasury yields lifted the dollar to a 2023 peak on the embattled yen. Geopolitics was an added worry after a Russian warship on Sunday fired warning shots at a cargo ship in the southwestern Black Sea, heralding a new stage of the war that could impact on oil and food prices. MSCI’s broadest index of Asia-Pacific shares outside Japan lost another 1.7%, after shedding 2% last week. Japan’s Nikkei was off 1.3%, even as exporters drew support from the weak yen. Chinese blue chips fell 1.2%, on top of a 3.4% decline last week, amid a string of disappointing economic news culminating in a dire report on new bank loans in July.

Figures on retail sales and industrial output are due Tuesday and analysts assume they will underwhelm, keeping downward pressure on the yuan. Adding to concerns about the deteriorating health of the country’s debt-laden property developers was news two Chinese listed companies had not received payment on maturing investment products from Zhongrong International Trust Co. China’s Country Garden, the country’s top private property developer, is also set to suspend trading of its 11 onshore bonds from Monday. EUROSTOXX 50 futures slipped 0.4% and FTSE futures 0.2%. The sour mood saw S&P 500 futures and Nasdaq futures shed early gains to each ease 0.2%. That followed losses on Friday when surprisingly high readings on U.S. producer prices tested market optimism that inflation would cool enough to avoid further rate hikes.

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Figures on U.S. retail sales this week are forecast to show a 0.4% pick up in spending, with risks on the high side thanks in part to Amazon’s Prime Day. Analysts at BofA say data on credit and debit card spending suggests sales could rise 0.7% with activity around the July 4 holiday stronger than last year. Such an outcome would challenge the market’s benign outlook for rates, with futures implying a 70% chance the Federal Reserve is done hiking. The market also has more than 120 basis points of cuts priced in for next year starting from around March. Minutes of the Fed’s last meeting are due on Wednesday and could show members wanted to keep their options open on further hikes.

Analysts at Goldman Sachs argue the market has gone too far in pricing in aggressive easing. “The motivation for cutting outside of a recession would be to normalise the funds rate from a restrictive level back toward neutral once inflation is closer to the target,” they wrote in a note. “Normalisation is not a particularly urgent motivation for cutting, and for that reason we also see a significant risk that the Fed will instead hold steady.” They expect cuts of only 25 basis points a quarter starting from the second quarter of next year, with the funds rate eventually stabilising at 3-3.25%. The resilience of the economy combined with a truly massive government borrowing requirement kept 10-year Treasury yields up at 4.18%, after a rise of 12 basis points last week.

That rise juiced the dollar against the low-yielding yen, hoisting it as far as 145.22 and a peak not seen since November last year. Concerns about possible intervention then saw it edge back to 144.92. “The near 5% lift in USD/JPY since mid-July may prompt Japanese officials to warn against the rapid yen weakness,” said Kristina Clifton, a currency strategist at CBA. “Yet markets appear convinced by the BOJ’s consistently dovish message that it will not tighten policy over the foreseeable future.” The euro has already reached its highest since late 2008 and was holding firm at 158.51 yen . The single currency was more range-bound on the dollar at $1.0933.

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The dollar was also climbing on its Australian and New Zealand counterparts, along with a range of emerging Asian currencies, all being dumped as proxies for China risk. The ascent of the dollar and yields was weighing on gold at $1,912 an ounce , having fallen for three weeks in a row. Oil prices have been going the other direction as tight supply meets forecasts of strong demand to deliver seven straight weeks of gains. Monday saw some profit-taking nudge Brent down 78 cents to $86.03 a barrel, while U.S. crude fell 76 cents to $82.43 per barrel.

Published by the Mercury Team on 14 August 2023