South African rand jumped due to encouraging domestic data

The South African rand jumped on Thursday, clinging to gains made since the start of the week on a weakening dollar and encouraging domestic data.

Reuters: The South African rand jumped on Thursday, clinging to gains made since the start of the week on a weakening dollar and encouraging domestic data.

SOUTH AFRICAN RAND JUMPED

At 1512 GMT, the rand traded at 18.8600 against the dollar, more than 1.2% stronger than its previous close. The dollar was last trading at 103.390 – around 0.63% weaker – against a basket of global currencies. The South African rand on Wednesday briefly strengthened below 19 to the dollar for the first time in three weeks, also boosted by an easing of rolling power cuts. The South African Reserve Bank on Thursday released data that showed the country’s first-quarter current account deficit of gross domestic product.

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South Africa’s manufacturing output rose 3.4% year-on-year in April after falling by a revised 1.8% in March, statistics agency data showed. The rand has been recovering after a tumultuous May when it tumbled more than 7% against the dollar on record power cuts and U.S. allegations that South Africa had supplied arms to Russia. Nonetheless, investor sentiment remains sour with survey data on Wednesday showing business confidence at a three-year low. On the Johannesburg Stock Exchange, the blue-chip Top-40 index closed nearly 0.2% weaker. South Africa’s local benchmark 2030 government bond was marginally stronger, with the yield down 1 basis point at 10.830%.

BRITISH POUND

Reuters: Sterling ticked higher on Thursday on expectations for more interest rate hikes by the Bank of England after a forecast showed UK inflation is set to remain elevated this year. Britain will have the highest inflation of any leading economy in 2023 at 6.9%, forecasts from the Organisation for Economic Co-operation and Development released on Wednesday showed. Sterling rose 0.35% to $1.2482 and was set for its second consecutive weekly rise. Against a strengthening euro, it was flat at 86.06 pence and stood not too far from a six-month high hit against the single currency last week. Shaun Osborne, chief FX strategist at Scotiabank in Toronto, said data from OECD was somehow supporting the sterling. “Sticky prices are impacted by high imported items costs. That’s not a good look for the pound but it should also be no surprise that markets are still pricing close to another 100 basis points of BoE tightening over the coming months to combat price gains,” he added.

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Sterling also got a boost after Canada’s central bank surprised markets on Wednesday by hiking its overnight rate to a 22-year high of 4.75%. Interest-rate sensitive, British two-year government bond yields hit on Thursday their highest level since last September’s “mini-budget” turmoil amid a continued selloff of government bonds in global markets on worries about further increases in borrowing costs. Money markets are almost fully pricing in a 25 basis points interest rate hike by the Bank of England on June 22. They also expect similar moves when the central bank meets in August and September.

Chris Turner, head of markets at ING, said for sterling the next main event in the calendar will be next Tuesday’s release of jobs and wages data. “We see that as a negative event risk for sterling, where wage growth could continue to slow and take some of the steam out of the 100bp+ BoE tightening expectations still priced in by money markets,” he said. Britain’s labour market cooled further in May as starting salaries for permanent staff rose at the weakest pace in over two years, according to a survey of recruiters on Thursday that the BoE watches closely.

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U.S. DOLLAR

Reuters: The dollar retreated on Friday, dragged down by lower U.S. Treasury yields after a spike in weekly jobless claims raised hopes that a peak in U.S. interest rates was near, as the focus turned to the upcoming week packed with central bank meetings. The number of Americans filing new claims for unemployment benefits surged to the highest in more than 1-1/2 years last week, data on Thursday showed, though layoffs are probably not accelerating as the data covered the Memorial Day holiday, which could have injected some volatility. Nonetheless, that was enough to knock the U.S. dollar to a more than two-week low against a basket of currencies in the previous session, as investors took the data as a sign that the U.S. labour market was slowing.

The dollar index last stood at 103.41 in Asia trade on Friday, having lost more than 0.7% in the previous session, its largest daily decline in weeks. The index, which measures the U.S. currency against six major peers, is down 0.6% for the week, set for its worst week since mid-March. Against the Japanese yen , the greenback dipped to a one-week low of 138.765, tracking a slide in U.S. Treasury yields. It was fetching 139.27 per dollar. The benchmark 10-year Treasury yield last stood at 3.7317%, after falling 7 basis points on Thursday. The two-year yield , which typically moves in step with interest rate expectations, steadied at 4.5261%. “We do think that the U.S., like many economies, will go through a shallow recession this year. So that’ll show up in payrolls numbers and jobless claims and these sorts of numbers,” said Jarrod Kerr, chief economist at Kiwibank.

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Elsewhere, sterling touched a near one-month high of $1.2564, while the kiwi eased 0.11% to $0.6089. The Turkish lira tumbled more than 1% against the dollar to a record low of 23.54 after President Tayyip Erdogan appointed Hafize Gaye Erkan, a finance executive in the United States, to head Turkey’s central bank. “A return to policy orthodoxy seems inevitable given the materially diminished foreign exchange reserves and 40% inflation,” said Mohammed Elmi, senior portfolio manager for emerging markets fixed income at Federated Hermes. Markets are now turning their attention to the coming week which will see the Federal Reserve, the European Central Bank and the Bank of Japan announce interest rate decisions following their respective policy meetings.

The Fed takes centre stage, with money markets leaning toward a pause, though they have priced in a 25% chance that the U.S. central bank delivers a 25 bps rate hike. “A slowing U.S. economy gives the Fed room to pause after 500 bps of consecutive interest rate rises,” said Guillermo Felices, global investment strategist at PGIM Fixed Income. “The key question for markets is whether the Fed will just skip a hike in June and resume their tightening campaign in July.” Meanwhile, a clear majority of economists polled by Reuters expect the ECB to hike its key interest rates by 25 bps on June 15 and again in July before pausing for the rest of the year as inflation remains sticky.

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The euro was last steady at $1.0776, flirting with Thursday’s over two-week high of $1.0787. The single currency is up 0.6% for the week and on course to snap four-week losing streak. The Canadian dollar last bought C$1.3371, not far from its one-month high of C$1.3321 hit on Wednesday, while the Aussie stood near a roughly one-month peak at $0.6711. Both currencies have drawn support from surprise rate increases by their respective central banks this week, which caused markets to revise their expectations for a peak in global interest rates. China’s yuan weakened as deepening factory gate deflation added to investors’ concerns about the country’s fragile economic recovery.

GLOBAL MARKETS

Reuters: Asia-Pacific equities rose to their highest level since mid-February on Friday, taking cues from an overnight Wall Street rally as market bets firmed for the Federal Reserve to skip a rate hike next week. Japanese and Australian bond yields followed those on U.S. Treasuries lower, and the dollar remained on the defensive early in the Asian session. MSCI’s broadest index of Asia-Pacific shares added 0.6%, and at one point touched its strongest level since Feb. 16. Much of that was driven by a 1.66% jump in Japan’s Nikkei, which rebounded strongly following its plunge from a 33-year high in the previous session. Hong Kong’s Hang Seng added 0.21%, while mainland Chinese blue chips edged 0.1% higher.

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On Wall Street, gains were led by the tech-heavy Nasdaq, which surged 1.27%. The broader S&P 500 rose 0.62%. E-mini U.S. equity futures in Asia pointed to about a 0.1% lower restart for each of the indexes. Traders now lay 1-in-4 odds for the Fed to raise rates by a quarter point on June 14, versus 75% probability of a pause. However, the market sees a hike as mostly assured by the July 26 decision, laying the odds at about 80%. Bets for a pause were supported by data overnight showing the number of Americans filing new jobless claims surged to a more than 1 1/2-year high.

Still, some analysts point to surprise rate increases at the Bank of Canada and Reserve Bank of Australia this week as reasons not to be complacent. “I wouldn’t go all in and say we’re going to get a rate hike, but I think we should be at least 50% priced,” said Tony Sycamore, an analyst at IG Markets in Sydney. “I know people can point to Fed Chair Jerome Powell’s comments as being more supportive of a hold than a hike, but there have been some interesting developments since he last spoke,” Sycamore added. “I can’t imagine he’d be happy by the increase in core PCE inflation, nor the robust gain in non-farm payrolls.” Powell said on May 19 that it was still unclear if U.S. interest rates will need to rise further, and the risks of overtightening or undertightening had become more balanced.

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Two-year Treasury yields, which are extremely sensitive to monetary policy expectations, were little changed at around 4.53% in Tokyo after a 3 basis-point decline by the New York close. The 10-year yield edged up to 3.73% after tumbling 7 bps overnight. The U.S. dollar index, which measures the currency against a basket of six major peers, was little changed at 103.34, sticking close to the more than two-week low of 103.29 reached on Thursday. The dollar added 0.15% to 139.135 yen, after earlier slipping to a one-week low of 138.765. The euro was flat at $1.0784, just below Thursday’s two-week high of $1.0787.

Elsewhere, the Turkish lira extended its decline to a new record low of 23.54 per dollar, even as President Tayyip Erdogan’s appointment of a U.S. banker as central bank chief sent a fresh signal for a return to more orthodox policy. Crude oil remained on the back foot on Friday following a report that the United States and Iran were close to a nuclear deal, although denials from both parties. Optimism for a deal, which reportedly included scope for an additional 1 million barrels per day of Iranian production, had eknocked down West Texas Intermediate crude by $3.50 to just shy of $69 at one point on Thursday. WTI fututes were last 47 cents weaker than Thursday’s close at $70.83. Brent crude futures were off 47 cents at $75.49.

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