South African rand was weaker ahead of busy U.S. data week

Reuters: The South African rand was weaker in early trade on Monday against a stronger dollar ahead of a data-filled week both locally and abroad.

SOUTH AFRICAN RAND WAS WEAKER

At 0705 GMT, the South African rand traded at 18.6800 against the dollar, about 0.3% weaker than its previous close. The dollar last traded around 0.2% stronger against a basket of global currencies. Local data releases include third-quarter gross domestic product, October and November business confidence index data and whole economy PMI.

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Markets await employment data out of the U.S. on Friday for further hints on the interest rate path of the economic powerhouse after Federal Reserve Chair Jerome Powell last week said the Fed would move “carefully” on interest rates. Like other risk-sensitive currencies, the South African rand often takes it cues from global drivers such as U.S. monetary policy. On the Johannesburg Stock Exchange, the blue-chip Top-40 index was up about 0.3% in early trade. South Africa’s benchmark 2030 government bond was slightly stronger in early deals, with the yield down 3 basis points at 9.950%.

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U.S. DOLLAR

Reuters: The U.S. dollar regained some ground on Tuesday and hovered near a one-week high against a basket of currencies including the South African rand, while the Australian dollar fell after its central bank left interest rates unchanged. The Aussie was last down 0.66% to $0.6576 after the Reserve Bank of Australia kept rates at a 12-year high of 4.35% on Tuesday, as expected, and noted that economic data received since November had been broadly in line with expectations. That left the Antipodean currency some distance away from Monday’s four-month top of $0.6690, which it hit on the back of the dollar’s decline over the past few sessions. “The Aussie has had a great run in recent weeks and was arguably overbought over the near-term,” said Matt Simpson, senior market analyst at City Index.

“So we may be seeing a combination of profit taking following the fact of the RBA’s hold, and the closure of pre-emptive bets that the RBA may have delivered a more hawkish statement.” The decline in the Aussie also dragged the New Zealand dollar slightly lower, with the kiwi last down 0.35% to $0.6146. Elsewhere, the greenback held broadly steady and pushed away from Monday’s three-month low against the yen. The dollar last traded at 147.10 yen, helped by a slowdown in core consumer inflation in Tokyo that put downward pressure on the Japanese currency.

The euro, meanwhile, languished near a three-week low hit on Monday and last traded $1.0842, while the dollar index stood near a more than one-week high and was last at 103.60. Sterling was little changed at $1.26345, some distance away from its recent three-month high. Analysts say the greenback’s move higher was in part due to a reversal of its heavy selloff in recent weeks, which saw the dollar index falling some 3% in November, its steepest monthly decline in a year. “I think it’s maybe just a little bit of a reassessment as to the U.S. dollar having fallen too far, and too fast,” said Sean Callow, a senior currency strategist at Westpac.

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U.S. economic indicators this week, including November’s non-manufacturing ISM figures and the closely watched nonfarm payrolls report, will provide further clarity on the future path of interest rates. Traders have all but priced in a rate cut from the Federal Reserve by the first half of next year. “The Fed will be reactive to the hard data and not anticipatory of it,” said Thierry Wizman, Macquarie’s global FX and interest rates strategist. “So as long as the activity data deteriorates and inflation retreats, convergence toward lower yields will resume.”

In cryptocurrencies, bitcoin last stood at $41,806, not far from the previous session’s peak of $42,404, its highest level since April 2022. The world’s largest cryptocurrency has charged roughly 153% higher this year on U.S. rate cut expectations and bets that American regulators will soon approve exchange-traded spot bitcoin funds, opening the bitcoin market to millions more investors. “$40,000 has acted like a magnet since Bitcoin finally broke through $30,000 in late October,” said crypto-services firm Nexo co-founder Antoni Trenchev. “It was only a matter of time before the next round number succumbed as enthusiasm about a spot ETF reaches fever pitch.”

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GLOBAL MARKETS

Reuters: Asian stocks slipped to three-week lows on Tuesday while bonds and the dollar steadied as investors tempered expectations for cuts to U.S. interest rates and waited on U.S. jobs data. The Australian dollar fell 0.5% after the central bank left interest rates on hold, as expected, and emphasised that the future direction rates would depend on data. MSCI’s broadest index of Asia-Pacific shares outside Japan was down 0.9% in early trading. Japan’s Nikkei was dragged 1% lower to a three-week trough, mostly thanks to falling chipmaking stocks. Gold hung on above $2,000 after a wild session on Monday, when it hit a record high in Asia before recoiling sharply lower.

Treasuries had come under a little pressure overnight as traders calibrated pretty aggressive pricing for U.S. interest rate cuts. Two-year yields rose 9.1 basis points and were steady at 4.64% in Asia trade. Having been encouraged by a benign inflation report three weeks ago, futures imply about 125 bps of cuts in 2024. U.S. job openings data is due at 1530 GMT, and broader hiring figures, which had last month showed signs of a slowdown in the job market, will be published on Friday.

“While it’s understandable the market has embraced the recent improvement in inflation and softer October labour market data, strong momentum in the economy remains,” ANZ analysts said in a note to clients. “We therefore expect that the Fed, while encouraged by recent inflation improvements, will continue to adopt a hawkish policy stance.” In Asian stock markets, Hong Kong shares led declines with the Hang Seng slumping to a fresh one-year low. At 16,470, the index is trading below its pre-Asian financial crisis high and is down almost 17% in a year when global stocks are up 15%.

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In currency markets, the dollar, which suffered its sharpest monthly decline for a year in November, rose slightly overnight. The euro sat at $1.0837 on Tuesday, just above support at its 200-day moving average. The Australian and New Zealand dollars retreated from multi-month highs on Monday. They were last a little weaker, with the Aussie dropping 0.5% to $0.6583, where it was testing support at its 200-day moving average. The Reserve Bank of Australia left interest rates on hold and said, as it had a month ago, that future rate settings would depend on data.

Falling coal and gas prices pushed Australia’s current account into deficit in the September quarter, data on Tuesday showed. Core inflation in Tokyo slowed in November, leaving the yen steady at 147.22 per dollar. In commodity trading, Brent crude futures traded broadly steady at $78.31 a barrel, having fallen overnight on doubts that producers will make further cuts to output. Chicago wheat hit its highest level since late August after the U.S. Department of Agriculture confirmed the largest one-off private sale to China in years.

BRITISH POUND

FXStreet: The GBP/USD pair edges higher during the Asian session on Tuesday and looks to build on the overnight bounce from the 1.2600 mark, representing the lower boundary of a one-week-old trading range. Spot prices currently hover around the 1.2630-1.2635 region and draw support from a combination of factors. The US Dollar struggles to capitalize on the previous day’s strong move up to over a one-week top amid expectations that the Federal Reserve will not hike interest rates again and may start easing its policy as early as March 2024. This triggers a fresh leg down in the US Treasury bond yields and keeps the USD bulls on the defensive, which, in turn, is seen as a key factor acting as a tailwind for the GBP/USD pair.

The British Pound, on the other hand, is underpinned by diminishing odds for an early rate cut by the Bank of England. In fact, BoE Governor Andrew Bailey recently warned that it was too early to declare victory over inflation and predicted that monetary policy will have to stay restrictive for quite some time to make sure that inflation gets back to the 2% target. This further contributes to the GBP/USD pair’s uptick. That said, a softer risk tone is seen lending some support to the safe-haven Greenback and holding back traders from placing aggressive directional bets.

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Investors also seem reluctant and prefer to wait on the sidelines ahead of this week’s important US macro data, starting with the release of the ISM Services PMI later during the early North American session. The focus, however, will remain on the key US NFP report on Friday. Nevertheless, the aforementioned fundamental backdrop seems tilted in favour of bullish traders and suggests that the path of least resistance for the GBP/USD pair is to the upside. However, it will still be prudent to wait for a sustained move beyond the 1.2725-1.2730 supply zone, or the top end of a short-term trading range, before positioning for any further appreciating move ahead of the final UK Services PMI print.

Published by the Mercury Team on 5 December 2023