South African rand firmed after mid-term budget: U.S. dollar fell

Reuters: The South African rand firmed on Wednesday after South Africa’s mid-term budget statement, despite the proposal for tax measures next year to raise additional revenue as budget deficits are projected to widen over the next three years.

SOUTH AFRICAN RAND FIRMED

At 1510 GMT, the rand traded at 18.5975 against the dollar, over 0.3% stronger than its previous close. The dollar last traded around 0.07% stronger against a basket of global currencies. Finance Minister Enoch Godongwana announced that revenue collections in the current 2023/24 fiscal year were below estimates in the main February budget.

ALSO READ: Eskom debt: Government to write off billions of municipalities’ bills

The Treasury said it remained committed to stabilising public finances through spending cuts and unspecified tax revenue measures, as well as a reconfiguration of government that would involve the merging or closure of state-owned entities. “The positive response by the ZAR is perhaps a sign of approval pertaining to the suggested fiscal discipline and no news of further allocations to ailing SOEs,” said Shaun Murison, a senior market analyst at IG. Major constraints on South Africa’s economic growth in the past decade have been rolling power cuts, as utility Eskom struggles with breakdowns of its ageing coal plants, and underperformance at state-owned logistics company Transnet.

ALSO READ: Fuel price: MORE good petrol, diesel news awaits in December 2023

“The overall message is doubling down on spending-led fiscal consolidation and what is most striking is the downward revisions to primary spending next year and in the forecast horizon,” said Andrew Matheny, economist at Goldman Sachs. International investors responded positively to the budget, after the government’s sovereign dollar bonds fell as much as 0.6 cent earlier in the day. Longer-dated notes rose the most, with the 2052 maturity up 1.021 cents on the dollar to 78.716 cents at 1508 GMT.

“The main positive is that there is no additional bond issuance over and above what was already factored in,” Nick Eisinger, co-head emerging markets active fixed income at Vanguard, said. “That has seen the bonds rally a bit.” On the Johannesburg Stock Exchange, the blue-chip Top-40 index closed almost flat. South Africa’s benchmark 2030 government bond was stronger, with the yield down 11 basis points to 10.565%.

U.S. DOLLAR

Reuters: The dollar fell broadly on Thursday, tracking a slide in U.S. Treasury yields as markets grew more convinced the Federal Reserve was done with its aggressive monetary policy tightening cycle after it left rates unchanged. The Fed on Wednesday held interest rates steady as widely expected, as policymakers struggled to determine whether financial conditions may be sufficiently tight to control inflation. However, Fed Chair Jerome Powell acknowledged that a recent market-driven rise in Treasury bond yields, home mortgage rates and other financing costs could have their own impact on the economy as long as they persist. The decision lifted sentiment in Wall Street, which spilled over into the Asia day, giving a small boost to the risk-sensitive Australian and New Zealand dollars.

ALSO READ: Phethuxolo Ngoyi: Turning trash to treasure

The Aussie rose 0.5% to a three-week high of $0.6426, while the kiwi similarly jumped more than 0.5% to hit a two-week top of $0.58825. The dollar edged broadly lower alongside U.S. Treasury yields which touched multi-week lows in early Asia trade. “It seems to us that the FOMC is now in hold mode, albeit in a hawkish way, rather than simply on pause,” said Wells Fargo chief economist Jay Bryson. “That is, we think the bar to further rate increases is higher now than it was a few months ago.”

The two-year U.S. Treasury yield, which typically reflects near-term interest rate expectations, slid to a nearly two-month low of 4.9250% on Thursday, while the benchmark 10-year yield fell to an over two-week low of 4.7070%. Against the dollar, the euro rose 0.18% to $1.0589. The U.S. dollar index fell 0.11% to 106.34. Traders also drew further conviction that U.S. rates could have peaked after data showed U.S. manufacturing contracted sharply in October, though separate data pointed to a still-resilient labour market, which is likely to see the Fed keeping rates at restrictive levels for longer.

“We will likely need to see some labour market weakness before target inflation is reached,” said Lon Erickson, portfolio manager at Thornburg Investment Management. “This could take some time to develop and is one reason we are likely to see higher rates for longer.” Market pricing shows a nearly 15% chance that the Fed could begin cutting rates as early as next March, according to the CME FedWatch tool, compared with a roughly 10% chance a week ago. The move lower in the dollar brought some respite for the yen, though it remained on the weaker side of 150 per dollar.

ALSO READ: Who is the richest person in the world today? Top 10 list – 2 November 2023

The Japanese currency last stood at 150.44 per dollar, having slid to a one-year low of 151.74 per dollar earlier in the week in the wake of the Bank of Japan’s monetary policy decision. Investors were still struggling to digest the implications of the central bank’s piecemeal tweak to its controversial bond yield control policy – a move that has sent Japan’s bond market and currency reacting in divergence.

“This almost feels like the end of the line for YCC, but the extent to which the BOJ will intervene in the JGB market should 10-year yields rise above 1% is as yet unclear,” said Tom Kenny, senior international economist at ANZ. “We think the BOJ will be content to let longer duration yields move higher in an orderly manner and that intervention is likely to occur if moves are volatile.” Elsewhere, sterling rose 0.35% to $1.2192 ahead of the Bank of England’s rate decision later on Thursday, where expectations are for the central bank to keep rates on hold.

BRITISH POUND

FXStreet: The GBP/USD pair is seen building on the previous day’s bounce from sub-1.2100s and gaining some follow-through positive traction during the Asian session on Thursday. The momentum lifts spot prices to the top end of the weekly range, closer to the 1.2200 round figure, and is sponsored by a modest US Dollar weakness. The USD Index, which tracks the Greenback against a basket of currencies, retreats further from a near one-month high touched on Wednesday in the wake of expectations that the Federal Reserve may be done raising interest rates. The US central bank, as was widely anticipated, decided to keep the key overnight interest rates unchanged in the 5.25%-5.50% range, or a 22-year high for the second time in a row.

ALSO READ: Who are the richest South Africans in the world today? – 2 November 2023

In the accompanying monetary policy statement, the Fed acknowledged the need for another rate hike on the back of the US economy’s unexpected resilience. However, Fed Chair Jerome Powell’s comments at the post-meeting press conference raised doubts if the US will hike rates again. Powell said that the Fed has a long way to go to bring inflation back to the 2% target, though noted that financial conditions have clearly tightened and cited plenty of risks. Investors, meanwhile, seem convinced that the Fed will start cutting rates next year, which is evident from a further steep decline in the US Treasury bond yields and is seen weighing on the buck.

Apart from this, a generally positive tone around the equity markets turns out to be another factor undermining the safe-haven Greenback and lending support to the GBP/USD pair. It, however, remains to be seen if bulls are able to capitalize on the move up or opt to wait on the sidelines as the focus shifts to the Bank of England policy meeting later today. The UK central bank is all but certain to maintain the status quo amid signs of slowing economic activity and decreasing inflationary pressures. Investors, meanwhile, will keep a close eye on the Monetary Policy Committee vote split, which will influence market expectations about future rate decisions and play a key role in influencing the British Pound.

Apart from this, the US economic docket, featuring the usual Weekly Initial Jobless Claims and Factory Orders data, will be looked upon to grab short-term opportunities around the GBP/USD pair. The market attention, however, will remain glued to the release of the closely-watched US monthly employment details, popularly known as the NFP report on Friday.

ALSO READ: Eskom debt: Government to write off billions of municipalities’ bills

GLOBAL MARKETS

Reuters: Asian shares and bonds extended a global rally on Thursday as a non-committal Federal Reserve Chair had markets double down on bets that U.S. interest rates have peaked and cuts are on the way. Investors are now awaiting the results from Apple later in the day, a bellwether for consumer demand and the tech sector. The Cupertino California-based company is expected to report a 1% decrease in quarterly revenue. MSCI’s broadest index of Asia-Pacific shares outside Japan surged 1.7% to the highest level in one week. Tokyo’s Nikkei gained 1.4% to cross the 32,000 level for the first time in two weeks. China’s blue chips were 0.3% higher, while Hong Kong’s Hang Seng index jumped 1.7%. Stock futures in Europe and U.S. also gained. EUROSTOXX 50 futures rose 0.8% early in Asia, while S&P 500 futures added 0.3% and Nasdaq futures increased 0.5%.

Overnight, the Fed held the policy rate steady in its current 5.25%-5.50% range. While Chair Jerome Powell did not rule out another hike, markets judged he was not quite as hawkish as he might have been. Fed funds futures rallied as markets pared back the risk of a December hike to about 22% and a January move to 28%. Markets have priced in a 70% chance that the tightening is over and rate cuts could amount to 85 basis points next year, beginning as soon as June. Wall Street and Treasuries rallied. The S&P 500 gained 1% and the Nasdaq Composite surged 1.6%.

The benchmark 10-year Treasury yield eased another 2 basis points to 4.7089%, the lowest in more than two weeks. Overnight, it tumbled 14 basis points, the biggest daily drop since March, also in part due to a Treasury announcement that said the government will slow increases in the size of its longer-dated auctions. “While growth was incredibly strong in the third quarter of 2024 at 5%, we suspect a substantial slowing in 4Q24, which, based on Powell’s remarks today, likely won’t be enough to garner additional tightening,” Tiffany Wilding, an economist at PIMCO, wrote in a note to clients. “Instead the FOMC is happy to remain on hold, and watch and see how the economy evolves early next year.”

ALSO READ: The difference between PROVISIONAL and individual taxpayers

The next big focal point for the market is the non-farm payrolls data on Friday, which analysts expect to show the economy added 180,000 jobs in October, slowing from 336,000 increase the previous month. It will come after private payrolls increased far less than expected. The dollar was again on the back foot on Thursday, falling 0.1% against its peers. The prospect that the Fed is done tightening buoyed risk sensitive currencies the most, with Australian dollar bouncing 0.6% to a three-week high of $0.6428. “Although the FOMC may not be talking about it today, within a few months, the question will no longer be ‘Will they hike again?’ but ‘When will they cut?’,” said Seema Shah, Chief Global Strategist at Principal Asset Management.

The yen continued to regain ground – up 0.3% to 150.46 per dollar on Thursday. It had hit a one-year low after a Bank of Japan decision to ease its control over the 1% cap on 10-year yields, with the tweak seen insufficient to close the wide interest rate gaps between Japan and other countries. Oil prices traded higher as the conflict in the Middle East kept investors on edge about whether it could disrupt oil supplies. Brent crude futures climbed 1.2% to $85.61 a barrel while U.S. West Texas Intermediate futures were at $81.43 a barrel, up 1.2%. The price of gold was 0.2% higher at $1,985.86 per ounce.

Published by the Mercury Team on 2 November 2023

For more news on global and local market performance, follow our business and finance page.