South African rand was weaker ahead of data-filled week

Reuters: The South African rand was weaker in early trade on Monday ahead of a week jam-packed with both local and global economic data releases.

SOUTH AFRICAN RAND WAS WEAKER

At 0645 GMT, the South African rand traded at 19.0150 against the dollar, about 0.2% weaker than its previous close. The dollar last traded around 0.07% stronger against a basket of global currencies. This week global investors await several developed market central bank meetings and data on U.S. inflation that could hint at the possibility of interest rate cuts next year.

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Locally, investors will on Wednesday turn their attention to consumer inflation for the month of November. The October inflation reading neared the upper limit of the central bank’s target range of 3% to 6% and influenced its decision to keep its main interest rate unchanged at its November meeting. South Africa’s benchmark 2030 government bond was slightly weaker in early deals, with the yield up 1.5 basis points to 10.070%.

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BRITISH POUND

Reuters: Sterling rose against the dollar on Monday as traders geared up for a busy week of data releases and central bank meetings including at the Bank of England. At 1138 GMT, sterling was up 0.24% against the dollar at $1.2578. The BoE will meet on Thursday for its final policy meeting of 2023. Market participants widely expect no change to the current Bank Rate which stands at a 15-year high of 5.25%. Market focus has shifted in recent weeks to when the BoE will cut the Bank Rate. Traders expect the British central bank to cut rates at a slower pace than the U.S.’s Federal Reserve. Stuart Cole, chief macro economist at Equiti Capital, said Monday’s rise in the pound can be attributed partly to this underlying theme that cable’s interest rate differential with the U.S. looks set to widen through next year.

“Second, I think there is some concern in the market that the BoE will use this week’s MPC meeting to push back on the easing we have been seeing in the markets,” said Cole. On the data front, UK labour market data will be released on Tuesday followed by GDP data on Wednesday, giving the market an important read on the state of the UK’s economy. Simon Harvey, head of FX analysis Monex, said his team expects this week’s data to confirm the BoE’s higher for longer stance on rates, with growth data unlikely to show a mild contraction relative to the euro zone, and data on the labour market to show wage pressures remaining high.

“For GBPUSD, this is unlikely to be a game changer, with the focus instead on dollar dynamics given the release of US CPI on Tuesday and fresh economic projections from the Fed on Wednesday,” said Monex’s Harvey. Elsewhere, manufacturing trade body Make UK said on Monday that Britain’s struggling factories are seeing some signs of recovery, helped by a long-awaited burst of restocking and a pickup in export orders that could help the sector in a challenging 2024.

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U.S. DOLLAR

FXStreet: USD/CAD continues its losing streak for the third successive day as the US Dollar Index turns negative post two days of gains. The USD/CAD pair trades lower around 1.3560 during the Asian session on Tuesday. Moreover, Crude oil prices hold steady after a three-day winning streak, potentially providing support for the Canadian Dollar. West Texas Intermediate trades near $71.70 per barrel during the Asian session on Tuesday. Oil prices saw an upswing following last week’s data release, signaling a level of resilience in the United States economy.

However, Crude oil prices could encounter challenges due to ongoing concerns about global demand, especially with weak economic data from China, the world’s largest oil importer, and other major economies. Additionally, worries persist about oversupply, despite production cuts imposed by OPEC+ members. The US Dollar Index loses ground amid stable US Treasury yields. The DXY bids lower below 104.00 at the time of writing. The US Dollar gained momentum from robust employment figures in the United States.

As the Federal Open Market Committee embarks on its two-day monetary policy meeting on Tuesday, the consensus expectation is for interest rates to remain unchanged. Market participants will closely scrutinize the statement for any indications regarding potential rate adjustments in the coming year. Additionally, Tuesday will be marked by the release of the US Consumer Price Index report for November, offering insights into potential paths for monetary policy. On the other side of the pond, the Bank of Canada Governor Tiff Macklem’s appearance, is scheduled for Friday. This event could be significant, and market participants will likely pay close attention to any insights or comments regarding the Canadian economic outlook and monetary policy.

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GLOBAL MARKETS

Reuters: Asian shares crept higher on Tuesday while the dollar eased as investors stayed cautious ahead of a crucial U.S. inflation report later in the day that will set the tone for the week filled with central bank meetings. The U.S. Federal Reserve is widely expected to hold rates on Wednesday, with the spotlight squarely on comments from Chair Jerome Powell during his press conference as well as the central bank’s dot plot and summary economic projections. Before that, the U.S. Labor Department’s Consumer Price Index report later on Tuesday is expected to show inflation still cooling but staying well above the Fed’s 2% annual target, with core CPI expected to come in at 4%.

That has meant investors are hesitant in placing major bets, with MSCI’s broadest index of Asia-Pacific shares outside Japan 0.38% higher. Japan’s Nikkei rose 0.72%. “Should core CPI come in at or above 4.2% year-over-year, equity traders will likely rush to hit the sell button first and ask questions later,” said IG market analyst Tony Sycamore. “Should core CPI print at 3.9% or less, it would be the green light for equity markets to extend gains into year-end.” Overnight, U.S. stocks registered modest gains but managed to close at new highs for the year.

In China, blue-chip stocks eased 0.28%, while Hong Kong’s Hang Seng index fell 0.20% as investors looked for signs of policy support after data showed China’s November consumer prices posted their fastest fall in three years. In a busy week for central bankers, the European Central Bank, Bank of England, Norges Bank and the Swiss National Bank all also meet on Thursday. Investors have steadily dialled back some of the expectations of the Fed cutting rates early next year. Markets are now pricing in a 45% chance of a rate cut in March compared with 57% a week earlier, according to CME FedWatch tool. Markets though have priced in 75% chance of a rate cut in May.

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“While any fireworks from the Fed meeting are ruled out, the market will likely be hoping for a message that at least helps keep the current rally intact,” said Gary Dugan, CIO of Dalma Capital. “We struggle to see how the Fed could endorse such a move higher in bonds and equities when the medium-term strength of economic data is unclear.” The yield on 10-year Treasury notes eased 0.6 basis points to 4.233% in Asian hours after lacklustre three- and 10-year note auctions on Monday.

Investors were reluctant to buy Treasuries in the auctions given thinner liquidity with the U.S. consumer price data and the Fed policy meeting on the horizon this week. The Treasury Department will sell $21 billion in 30-year reopened bonds on Tuesday, following Monday’s auction of $50 billion in reopened three-year notes and $37 billion in 10-year notes. In currency market, the Japanese yen remained in the spotlight as expectations that the Bank of Japan was ready to walk away from its ultra loose monetary policy faded after Bloomberg reported on Monday, citing sources, that BOJ officials see little need to rush out of negative rates.

Tom Kenny, senior international economist at ANZ, said a hike now seems premature with a backdrop of weak consumer spending but recent trends in inflation and wages suggest the BOJ is edging closer to achieving its 2% inflation target. “We anticipate the BOJ will start its journey of rate normalising by April 2024, other aspects of policy stance will remain open for adjustment, such as more tweaks to YCC or its complete end and removing its forward guidance that rates could go lower.”

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The Japanese yen strengthened 0.41% to 145.58 per dollar in early Asian trade after sliding nearly 0.8% on Monday. The BOJ is due to meet next week. The dollar index, which measures the U.S. currency against six rivals including yen, eased 0.067% to 103.99. Gold prices edged higher after touching a three-week low in the previous session ahead of the inflation report and Fed policy decision. Spot gold added 0.2% to $1,984.29 an ounce. U.S. crude rose 0.14% to $71.42 per barrel and Brent was at $76.09, up 0.08% on the day.

Published by the Mercury Team on 12 December 2023