Reuters: The South African rand extended gains on Monday, building from the previous week, as investor sentiment towards Africa’s most industrialised economy improved.
South African rand extended gains
At 1317 GMT, the rand traded at 18.5250 to the dollar, over 1% stronger than its closing level on Friday. The dollar was slightly weaker – trading at 103.450 against a basket of global currencies. Analysts say the rand’s gains come partly on the back of reduced intensity of power cuts at home and speculation that the BRICS summit of emerging countries may be moved out of Johannesburg due to the arrest warrant by International Criminal Court hanging over Russian President Vladimir Putin’s head. “The other factor that investors have cheered in recent days is reduced tensions between South Africa and the West regarding Russian relations,” said Kieran Siney of ETM Analytics.
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South Africa’s President Cyril Ramaphosa is expected this week to travel to Russia and Ukraine for an Africa-led peace mission in an attempt to end the ongoing war. “We usually see these types of dilemmas as an opportunity for foreigners to buy back into South Africa, even though it is mostly foreigners that created the initial selloff,” said Casparus Treurnicht, a Gryphon Asset Management portfolio manager. The rand has recovered over 6% in June after plummeting around 7% in May. South Africa’s sovereign dollar-denominated bonds also continued their June rally, with the 2044 maturity up the most, rising 1.560 cents at 1345 GMT to 73.424 cents in the dollar, according to Tradeweb data.
That was its highest level since early April. “Real progress in minimising load shedding is the main driver,” said Razia Khan, chief Africa economist at Standard Chartered refering to the power cuts. “Adding to the tailwinds for SA Eurobonds are growing expectations that the Fed could be done with its tightening cycle,” Siney of ETM Analytics added. Policy meetings of the U.S. Federal Reserve, the European Central Bank and the Bank of Japan will set the tone for the week, as markets seek clues from policymakers on the future path of interest rates. On the Johannesburg Stock Exchange, the blue-chip Top-40 index were last trading almost 0.5% stronger than its previous close. South Africa’s benchmark 2030 government bond was stronger, with the yield down 6 basis points to 10.760%.
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U.S. Dollar
Reuters: The dollar edged broadly lower on Tuesday but traded in a narrow range, as investors remained cautious ahead of key U.S. inflation data due later in the day just as the Federal Reserve kicks off its two-day monetary policy meeting. The U.S. Labor Department’s CPI report is expected to show that inflation cooled slightly in May, which could give the Fed room to pause its aggressive rate-hike cycle when it announces its interest rate decision on Wednesday. Markets are currently pricing in an 80% chance that the Fed will keep rates on hold at this week’s meeting, according to the CME FedWatch tool. Those expectations kept risk sentiment buoyant, pinning the U.S. dollar near multi-week lows against the risk-sensitive Australia and New Zealand dollars.
The Aussie was last 0.04% higher at $0.6753, after hitting a one-month top of $0.6774 in the previous session. The kiwi steadied at $0.6123, not far from Monday’s peak of $0.6153, its highest since May 24. “If inflation is above the consensus, then I think the market could put in a greater chance of a Fed rate hike this week,” said Joseph Capurso, head of international and sustainable economics at Commonwealth Bank of Australia. “But I think the Fed’s probably not going to hike and they’ll sound a bit dovish, and that’s going to push the U.S. dollar back down again.”
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Elsewhere, sterling rose 0.07% to $1.2520, after scaling a one-month peak of $1.2600 on Monday on hawkish comments by Bank of England policymakers, who said interest rates may have further to rise as inflation remains sticky. The euro gained 0.04% to $1.0760, with traders also focused on Thursday’s interest rate decision from the European Central Bank, following its policy meeting. “A 25 bp rate hike from the ECB at this week’s policy meeting is considered to be a done deal,” said Jane Foley, head of FX strategy at Rabobank. “It is widely assumed that the ECB is closing in on the end of its rate hiking cycle meaning that the market will be trying to evaluate not just how high rates will go, but how long they will remain at their peak.” Against the Japanese yen, the dollar rose 0.02% to 139.63.
The U.S. dollar index edged marginally higher to 103.59, after falling to 103.24 on Monday, its lowest since May 23. The Bank of Japan is due to announce a monetary policy decision on Friday, when it is expected to maintain its ultra-dovish stance and yield curve control settings. “We now expect the BOJ to change its YCC policy in July, but as in the past, it may effect this change without signalling ahead,” said Chong Hoon Park, head of Korea and Japan economic research at Standard Chartered Bank Korea. “The central bank will likely continue to send a dovish message or one of no intention of policy change until it changes direction.” In Asia, China’s central bank cut its seven-day reverse repo rate by 10 basis points to 1.90% from 2.00% on Tuesday, sending the yuan falling in the offshore market.
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British Pound
Reuters: Sterling held mostly steady on Monday, ahead of a week packed with central bank decisions and key economic data, starting with a read on the UK jobs market that could be pivotal in setting expectations for what the Bank of England may do next week. The currency market showed little reaction to developments on the political front in the UK, after the surprise resignation from parliament of former Conservative Prime Minister Boris Johnson and two fellow lawmakers over the weekend. The pound, which is heading for its third successive quarterly gain against the dollar, was up 0.1% at $1.2594. Volatility across the broader financial market was subdued on Monday, as traders prepared for a flurry of central-bank decisions on interest rates, starting with the U.S. Federal Reserve on Wednesday. The Fed is widely expected to leave U.S. interest rates unchanged in a range of 5.00-5.25%. Tuesday’s Consumer Price Index report might fine-tune what traders expect the central bank to do beyond the June meeting, as inflation remains well above its 2% target.
Expectations have also ratcheted higher for the BoE to keep raising interest rates beyond their current level of 4.5%, which has helped boost the pound. But, for now, the focus will remain squarely on the dollar. “In cable in particular, you’ve probably got more risk on the dollar side this week than the sterling side. So taking a view on cable should be really more about the CPI than on anything in the UK,” RBC Capital Markets strategist Adam Cole said. “If I were playing sterling, I’d be doing it more on the crosses than through cable,” he said. Against the euro, sterling fell 0.2% to 85.61 pence. The pound is heading for its sixth consecutive monthly gain against the euro, having risen 0.4%, largely as a function of how much more the BoE may raise interest rates relative to what the European Central Bank may have to do. BoE Monetary Policy Committee member Jonathan Haskel said in an article published on Monday the central bank may need to raise interest rates more than once from their current level to bring inflation under control.
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Meanwhile, Britain’s economy now looks likely to sidestep recession entirely this year but deep-rooted problems like weak business investment will persist, the Confederation of British Industry trade body said on Monday. UK political risk has ticked higher, after Johnson’s resignation and that of two other lawmakers will lead to three by-elections in a matter of weeks, an unwelcome development for Prime Minister Rishi Sunak. Stephen Gallo, global FX strategist at BMO Capital Markets, said in a note the chances of a general election in 2023, rather than next year, had increased. But he said this was unlikely to result in a big drop in the pound unless the gilts market reacted negatively. “It’s not clear where the impulse for such a move would come from in gilts, but the remaining June data releases on GDP, CPI inflation, public sector net borrowing need to be monitored closely,” he said. “If the data are indicative of deteriorating real growth, stubbornly high inflation, and a deteriorating fiscal picture, I would argue that the political backdrop will cause the response in gilts and sterling to be more severe,” he added.
Global Markets
Reuters: Asian shares edged up in early trade on Tuesday, following an upbeat session on Wall Street while investors turned their attention to key U.S. inflation data and the Federal Reserve’s interest rate decision this week. Investors will be closely monitoring U.S. Consumer Price Index data, due to be released on Tuesday, and Producer Price Index data, due out Wednesday, for a reading of how well the Fed’s tightening cycle has managed to curb inflation. The equity index’s gains partly reflected expectations for a Fed tightening pause for the first time since January 2022 and for CPI and PPI to come in lower than the prior month, investors and strategists said. “Overall equity markets reacted positively to expectations the monetary policy cycle may be nearing its peak,” ANZ analysts said in a note. “U.S. markets are now pricing a 72% probability that the Federal Reserve Monetary Policy Committee will hold rates at this week’s meeting.” In China, to prop up the economy, the central bank cut its seven-day reverse repo rate by 10 basis points to 1.90% from 2.00% on Tuesday, when it injected 2 billion yuan ($279.97 million) through the short-term bond instrument.
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Early in the Asian trading day, MSCI’s broadest index of Asia-Pacific shares outside Japan was up 0.3% while U.S. stock futures – the S&P 500 e-minis – rose 0.1% Japan’s Nikkei advanced 1.59% and Australian shares were down 0.03%. China’s blue-chip CSI300 index was 0.05% higher in early trade. Hong Kong’s Hang Seng index opened down 0.2%. On Monday, the S&P 500 and the Nasdaq rallied to their highest closing levels since April 2022. Lifted by gains in market heavyweights Amazon, Apple and Tesla, the S&P 500 has recovered 21% from its October 2022 lows, heralding the start of a new bull market, as defined by some market participants. The S&P 500 climbed 0.93% to end the session at 4,338.93 points. The Nasdaq gained 1.53% while Dow Jones Industrial Average rose 0.56%.
While the Fed is expected to keep rates steady, surprise rate hikes by the Reserve Bank of Australia and the Bank of Canada last week have still kept investors alert to the idea of prolonged tightening cycles. The European Central Bank will deliver its rate decision on Thursday with analysts expecting it to raise rates by 25 basis points and to signal that there is more ground to cover. But the Bank of Japan, which will announce its plan on Friday, is expected to maintain its ultra-loose policy. In U.S. Treasuries, the yield on benchmark 10-year Treasury notes reached 3.7375% compared with the U.S. close of 3.765% on Monday. The two-year yield, which rises with traders’ expectations of higher Fed fund rates, touched 4.5749% compared with a U.S. close of 4.592%.
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In currencies, the U.S. dollar index, which measures the greenback against a basket of major currencies, rose 0.019% to 103.600, while the European single currency was up 0.1% on the day at $1.0762. The dollar dropped 0.05% against the yen to 139.52. U.S. crude ticked up 0.15% to $67.22 a barrel. Brent crude rose to $72.01 per barrel. Gold was slightly higher. Spot gold was traded at $1959.29 per ounce.
Published by the Mercury Team on 13 June 2023
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