South African rand extended losses on stronger dollar

Reuters: The South African rand extended losses on Tuesday, bearing the brunt of the stronger dollar and surging U.S. Treasury yields, analysts said.

QUESTION: Could the South African Rand hit R25 to the Dollar?

SOUTH AFRICAN RAND EXTENDED LOSSES

At 1540 GMT, the South African Rand traded at 19.3700 against the dollar, 0.81% weaker than its previous close. The dollar last traded around 0.2% firmer against a basket of global currencies. On Monday the South African Rand slumped about 1.5%, dragged down by a buoyant dollar and a local purchasing managers’ survey that showed factory activity shrank for the eighth month in a row.

The South african Rand has had a turbulent year, falling to an all-time low against the dollar in June, recovering some ground and then slipping again. It is down more than 13% against the greenback year to date. South Africa’s energy department said on Tuesday that the price of petrol will increase by up to 114 cents a litre, while the price of diesel will rise by up to 197 cents a litre.

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“The significant fuel price increases will result in an unwelcome U-turn in headline inflation,” independent economist Elize Kruger said in a research note. “Such a notable deterioration in the headline CPI forecast, as I now expect to play out, is likely to increase the risk that interest rates might be hiked further,” Kruger added.

On the Johannesburg Stock Exchange, the blue-chip Top 40 index closed around 0.6% lower. The benchmark 2030 government bond was weaker in afternoon deals, with the yield up 12 basis points to 11.020%.

U.S. DOLLAR

Reuters: The yen sat on the stronger side of 150 per dollar on Wednesday, after an unexpected surge in the previous session stoked speculation that Japanese authorities could have intervened to support the currency. The Japanese currency was last marginally lower at 149.12 per dollar in early Asia trade, after having jumped nearly 2% at one point on Tuesday to a high of 147.30 – a move that came after the yen tumbled to 150.165 per dollar, its weakest since October 2022. “Them stepping in here would be perfectly consistent with recent warnings from top officials and past behaviour,” said James Malcolm, head of FX strategy at UBS.

“Authorities may be unable turn the trend in FX markets immediately. Yet entering the market in size provides a strong signal and helps buy time for other things to fall into place that in the fullness of time then contribute to position unwinds.” Japanese authorities last year intervened to prop up the yen for the first time since 1998. Other currencies similarly fell against the yen in the previous session, with the euro losing more than 1.5% to a low of 154.39 yen. It recovered some of those losses and last bought 156.05 yen.

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Japan’s top currency diplomat Masato Kanda said on Wednesday he would not comment on whether Tokyo intervened in the exchange-rate market overnight, though said that “we have only taken steps that have the understanding of U.S. authorities” U.S. Treasury Secretary Janet Yellen said last month whether Washington would show understanding over another yen-buying intervention by Japan “depends on the details” of the situation.

In the broader currency market, the dollar charged higher on the back of upbeat data on Tuesday showing U.S. job openings unexpectedly increased in August amid a surge in demand for workers in the professional and business services sector. That sent the greenback to a near 11-month high of 107.34 against a basket of currencies, with the dollar index last at 107.07. Sterling edged 0.03% lower to $1.20745, languishing near the previous session’s close to seven-month low of $1.20535. The euro similarly bottomed at $1.0448 on Tuesday, its lowest since December, and was last at $1.0469.

“Markets have been rattled by yet another positive U.S. data surprise vindicating the Federal Reserve’s mantra of higher for longer,” said Rodrigo Catril, Senior FX strategist at National Australia Bank. “The jump in job openings suggests the U.S. labour market is easing less rapidly than implied by recent data releases.vThat said, not all details in the report pointed to a strong labour market.”

Atlanta Fed President Raphael Bostic said on Tuesday the steady rise in long-term U.S. Treasury bond yields hasn’t yet shown signs of slowing the economy more than would be expected in a typical Fed tightening cycle. Meanwhile, Cleveland Fed President Loretta Mester said she is open to raising interest rates again. The Australian dollar was last 0.11% higher at $0.63085, having slid nearly 1% on Tuesday after the country’s central bank held interest rates steady for a fourth month and showed no urgency to hike again. The New Zealand dollar gained 0.07% to $0.5912, with an interest rate decision from the Reserve Bank of New Zealand due later on Wednesday, though expectations are for the central bank to also keep rates on hold.

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BRITISH POUND

Reuters: Sterling fell to a new 6-1/2-month low against the dollar on Tuesday on concerns about the economic outlook and expectations that the Bank of England might be done with rate hikes. The greenback reached fresh 11-month highs after strong U.S. economic data bolstered the view that the Federal Reserve will keep interest rates higher for longer. Sterling hit $1.2061, its lowest level since mid-March, and was last down 0.1% at $1.2075.

The gloom around the U.K. economy cleared a bit last week, as growth for the year’s first quarter was revised significantly upwards. Still, concerns about the state of the economy recently supported the pound selloff. Britain’s economy displayed apparent recession signals a couple of weeks ago, a day after the Bank of England called to halt its long run of interest rate increases.

“What hurt sterling was the adjustment of market expectations for future rate hikes,” said Roberto Mialich, global forex strategist at Unicredit, after mentioning that before summer investors priced in a terminal rate at 6%. Money markets show traders price a 32% chance of a rate rise at the upcoming BoE meeting in November. They also see an around 40% chance of a terminal rate at 5.5% by year-end or early 2024, from the current 5.25%, and almost no chance of the BoE hiking up to 6%.

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“We don’t see any catalyst able to change the market direction, with the pound that will probably test its year-to-date low at 1.1805,” Unicredit’s Mialich added. Speculators added to their short positions for the fifth week running in the week to Sept. 29, CFTC data showed. “The move was driven by an increase in short positions” after the BoE did not raise rates during the September 21 meeting, Jane Foley, senior forex strategist at Rabobank.

Last month, the pound fell by over 3% in its biggest slide since last September’s budget crisis, which stripped almost 4% off the currency. According to Francesco Pesole, rate strategist at ING, “the swap rate gap between U.S. and UK is consistent with GBP/USD trading around current levels and a break below 1.2000”. Against the euro, the pound was last up 0.1% on the day at 86.76 pence. Investors have sold the pound and the euro as Britain’s economic outlook and the euro zone have darkened.

GLOBAL MARKETS

Reuters: Asian stocks fell to a 11-month low on Wednesday after another piece of resilient U.S. economic data sent Treasury yields to fresh highs, while a sharp rise in the yen had traders speculating that Japanese authorities stepped into the market. The yen breached the 150-per-dollar level before suddenly shooting to 147.3. There was no confirmation from Tokyo, where Japan’s top currency diplomat made no direct comment on the move. The dollar/yen pair last stood at 149.11.

MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.4% to its lowest since November, with Australian shares also hitting an 11-month trough and South Korea’s Kospi back from a break with a 1.8% fall. Japan’s Nikkei dropped 1.7% to a four-month low. Overnight, U.S. job openings unexpectedly rose, increasing by the largest amount in more than two years. Ten-year Treasury yields rose almost a dozen basis points to a 16-year high of 4.81% and the S&P 500 fell 1.4%.

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“The jump in job openings suggests the U.S. labour market is easing less rapidly than implied by recent data releases, vindicating the Fed’s recent message that rates will remain higher for longer,” said NAB FX strategist Rodrigo Catril. Ten-year Treasury yields were steady in early trade on Wednesday and are up some 70 basis points since the start of September, in a move that has confounded market expectations for a peak in yields and in the U.S. dollar.

The dollar marched to a 10-month top on the euro at $1.0448 overnight and a seven-month peak on sterling at $1.20535. The New Zealand dollar slid 0.7% overnight and was last at $0.5912 ahead of a central bank meeting. Most of the focus, however, was on the dollar/yen pair, which has been under pressure from the growing gap between rising U.S. yields and anchored Japanese rates. It recoiled almost instantly after spiking to 150.165.

The sharpness of the move suggested a rate check or even outright buying from Japanese authorities, who have been warning they could intervene. “Market participants will closely watch what Japanese authorities have to say about the rapid and sharp yen gains overnight,” said CBA strategist Carol Kong. “The overnight moves suggest 150 can prove a strong resistance that said, dollar/yen will remain at the mercy of U.S. yields in our view.”

The yield spike also cruelled the gold price, which fell to a seven-month low of $1,814 overnight and had investors turning wary of taking risks on stocks and other growth assets. “With the risk-free rate so high, it’s not really compelling for people to allocate away from short-term cash-like investments,” said Mel Siew, a portfolio manager at Muzinich & Co in Singapore.

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Published by the Mercury Team on 4 October 2023

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