South African rand stabilised after volatile week

Reuters: The South African rand stabilised on Friday after a week of volatility, with the focus turning to domestic inflation and retail sales figures this week.

SOUTH AFRICAN RAND

Analysts and investors are gearing up for the mid-term budget on Nov. 1, when South Africa’s deteriorating public finances will be in the spotlight. At 1503 GMT, the South African rand traded at 19.0000 against the dollar, not far from its previous close of 19.0125. Meanwhile, shares on the Johannesburg Stock Exchange dipped, with the Top-40 index closing about 0.7% lower.

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South Africa’s benchmark 2030 government bond was weaker, with the yield up 6 basis points to 10.730%. The South African rand weakened on Monday on risk aversion linked to the Hamas attack on Israel, before gaining sharply on Tuesday and Wednesday on lower U.S. Treasury yields and dovish Fed comments. It fell again on Thursday as U.S. inflation rose more than expected and local economic data points were mixed.

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BRITISH POUND

Reuters: The pound edged up on Friday, after posting its largest daily drop against the dollar the previous day since March after U.S. inflation data came in hotter than expected, unnerving investors. Sterling was last up 0.1% on the day at $1.2178, having fallen by 1.1% on Thursday, as the dollar swept higher across the board. Against the euro, the pound was up 0.1% on the day at 86.40 pence.

Sterling fared poorly against the euro on Thursday as well, falling 0.3% in its largest one-day fall in three weeks. This week’s data releases might offer a steer on what to expect from the Bank of England when its policymakers meet in early November to set interest rates. “We remain of the view the BoE won’t help sterling much near term, but a ‘high for longer’ BoE could help sterling versus euro later – we see EURGBP at 85 pence through our forecast horizon,” Bank of America strategists said.

Persistently high inflation and record wage growth because of a tight labour market have complicated the BoE’s efforts to anchor consumer prices. Britain still has the highest inflation of any G7 nation and next year is expected to have the slowest growth, according to projections from the International Monetary Fund this week.

Growth in August was better than expected, but at 0.2%, is still tepid. “This week presents an opportunity for local UK developments to drive GBP/USD, something that has been absent for some time now, as UK unemployment and inflation data comes due,” Richard Snow, a strategist at DailyFX, said.

“The UK has experienced a moderate easing in the job market of late and this week’s IMF World Economic Outlook revealed challenges to growth this year and particularly in 2024. These developments should help contain inflation, but higher energy prices have threatened to reignite upside risks to inflation,” he said. Money markets currently show traders believe UK rates are very close to peaking, with only a 50/50 chance of another rate rise in the BoE’s current policy cycle.

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U.S. DOLLAR

Reuters: The dollar was on the front foot on Monday in cautious trade as tensions in the Middle East escalated, while investors awaited a speech by Federal Reserve Chair Jerome Powell later this week for further clues on the U.S. central bank’s rate outlook. The Israeli shekel fell to more than an eight-year low of 3.9900 per dollar in early Asia trade, after the country’s Prime Minister Benjamin Netanyahu vowed on Sunday to “demolish Hamas” as his troops prepared to move into the Gaza Strip in pursuit of Hamas militants.

Carry trades funded by the yen could be the biggest casualty of further escalation in the war, analysts said, as global investors who have for months been shorting the yen to invest in higher-yielding currencies buy it back as a safe-haven. The yen was last steady at 149.53 per dollar. The Japanese currency, which is near to potential intervention levels around 150, could also rally if the Fed has to stop hiking rates even as the Bank of Japan feels compelled by domestic inflation to tighten policy.

The BOJ has continued to maintain its ultra-easy policy settings although markets are rife with speculation that it could move to gradually exit from the accommodative stance sooner rather than later. “Obviously war is inflationary, disrupts growth and threatens risk assets,” James Malcolm, head of FX strategy at UBS in London. “The largest overhang I can see in this regard is dollar-yen, where the BOJ must pivot regardless and the carry trade that has built up now amounts to nearly half a trillion dollars.”

Elsewhere, the safe-haven dollar stood near a one-week high against a basket of currencies as risk sentiment remained fragile, pinning the euro near a one-week low hit on Friday. The single currency was last 0.11% higher at $1.0522. Sterling gained 0.06% to $1.21515, though it was similarly languishing near Friday’s one-week trough of $1.2123. “I view what’s going on in Israel as a regional conflict, which typically does not have meaningful impacts on financial markets over time,” said David Chao, Invesco’s global market strategist for Asia Pacific ex-Japan.

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“I don’t see it altering growth trajectories of the major economies nor does it make the Fed more hawkish. If anything, I think the Fed is less inclined to tighten going forward given the perception of heightened risks.” The Australian dollar, often used as a proxy for risk appetite, gained 0.19% to $0.6309, after sliding 1.4% last week.

On the policy front, traders looked to Fed Chair Powell’s speech before the Economic Club of New York later this week for clues on how much further U.S. interest rates could rise, after data last week showed consumer prices increased more than expected in September. Markets are largely expecting the Fed to keep rates on hold when it announces its next monetary policy decision in November, according to the CME FedWatch tool, though they see a roughly 32% chance the central bank could deliver a rate hike in December.

In other currencies, the New Zealand dollar gained 0.33% to $0.5904. New Zealand’s centre-right National Party led by Christopher Luxon will form a new government with its preferred coalition party ACT, as Prime Minister Chris Hipkins conceded his Labour Party could not form a government after Saturday’s general election.

“The kiwi dollar jumped this morning following a clear and decisive victory of New Zealand’s opposition National Party,” said Kyle Rodda, senior financial market analyst at Capital.com. “It appears the Nationals are in the position to win power while only requiring one coalition partner, excluding the populist New Zealand First party. “The kiwi has jumped on the prospect such dysfunction has been avoided.”

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GLOBAL MARKETS

Reuters: Crude oil held above $90 a barrel, equities slid and the safe-haven dollar was firm on Monday amid heightened anxiety over escalating violence in Gaza and the prospect the conflict could spread beyond Israel and Hamas into the wider region. Israel’s shekel sank to a more than eight-year low after the country’s prime minister, Benjamin Netanyahu, vowed to “demolish Hamas” in retaliation for the rampage on Oct. 7 that killed 1,300 people in the worst attack on civilians in Israel’s history.

U.S. Secretary of State Antony Blinken is visiting the region, seeking to prevent further escalation. Netanyahu agreed to lift a blockade of water supplies to parts of southern Gaza after speaking with U.S. President Joe Biden. Brent crude futures reached a recent high of $91.20 on Monday before trading little changed just below $91, following Friday’s 5.7% surge.

Japan’s Nikkei share average fell as much as 2%, while Hong Kong’s Hang Seng slipped 0.43% and mainland blue chips dropped 0.69%. Australia’s S&P/ASX 200 index lost 0.35%, New Zealand’s equity benchmark slid about 1%. On Friday, the pan-European STOXX 600 index lost nearly 1% and New York’s S&P 500 declined 0.5%, although U.S. stock futures pointed 0.2% higher on Monday.

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“The situation is dynamic and it’s too early to say if the hedges placed on Friday are unwarranted, but there have been pockets of positive news flow,” Chris Weston, head of research at Pepperstone, wrote in a note, citing the resumption of water supplies as one example. “Risk and energy markets will look for headlines and actions from Iranian officials who have stated they have a duty to come to the aid of the Palestinians.”

Currencies overall retraced some of their moves from the end of the week, with the U.S. dollar index easing slightly to 106.51 from as high as 106.79 on Friday. The euro rose 0.14% to $1.05255 while the yen was little changed at 149.445 per dollar. Israel’s shekel weakened to 3.9900 per dollar early in the day for the first time since April 2015, although it has since rebounded about 0.3% to 3.9650.

Benchmark 10-year U.S. Treasury yields edged up to 4.6581%, following a more than 8 basis point decline on Friday amid demand for the safety of bonds. Gold pared about $12 of Friday’s $63 gain, retreating 0.6% to $1,919.29 per ounce. “Ultimately, gold and oil prices are the most sensitive expressions of the Gaza conflict’s risks,” Kyle Rodda, senior financial market analyst at Capital.com, wrote in a note. However, “identifying the potential flashpoints and gaming-out scenarios is highly challenging,” Rodda said.

Published by the Mercury Team on 16 October 2023

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