This week, all eyes will be on the Reserve Bank as the South African rand plummets and the British pound falls against the US dollar.
Reuters: On Monday, the British pound retreated from a seven-month high versus the U.S. dollar reached during Asian hours. The pound had been buoyed last week by statistics indicating that the British economy was functioning better than feared, which fueled hopes of additional interest rate hikes. In early trading, the pound reached $1.24475, its highest level since June 10. Due to the Lunar New Year holidays, liquidity was low in major financial centers like Hong Kong and Singapore, which exacerbated market movements. The British pound was last trading at $1.2359, a decrease of 0.32%, and lost further ground against the euro, which increased 0.5% to 88.05 pence. “(The June high) is an important technical level, if we see a sustained break for cable (sterling/dollar) past that level then that opens the door for additional upside, but if this resistance level holds, we could see some consolidation,” said Lee Hardman, senior currency analyst at MUFG.
“The pound was one of the best performing currencies last week on the back of expectations of a 50 basis point hike as a result of data indicating a more resilient UK economy and upside inflation risks,” Hardman said. At the Bank of England’s February meeting, there is a 70% chance of a 50 basis point rate increase, according to market pricing. A 25 basis point increase is completely priced in, according to Refintiv statistics. British inflation slowed to 10.5% in November after reaching a 41-year peak in October. However, authorities have warned that a tight labor market will continue to exert upward pressure on inflation.
Core CPI, which excludes energy, food, alcohol, and tobacco and is considered by some economists to be a more accurate indicator of underlying inflation trends, remained constant at 6.3%.
Reuters: As traders evaluated the chances of a U.S. recession and the course of Federal Reserve policy, the dollar lingered near a nine-month low against the euro and surrendered recent gains against the yen on Tuesday. The U.S. dollar index, which measures the greenback against a basket of six rivals including the euro and yen, fell 0.12% to 101.89, edging closer to the 7-1/2-month low of 101.51 recorded last week. The euro rose 0.08 percent to $1.0880, bringing it closer to Monday’s high of $1.0927, the best level since April. “The United States is no longer the cleanest shirt in the global economic laundry,” said Ray Attrill, head of foreign-exchange strategy at National Australia Bank, who anticipates that the dollar index will fall to 100 by the end of March and the euro will increase to $1.10. The belief that the U.S. will not be the global growth leader is fundamental to our pessimistic U.S. dollar outlook.
Money market traders anticipate only two more quarter-point rate hikes by the Fed to reach a peak of approximately 5% by June, followed by two quarter-point rate decreases before the end of the year. The Fed has asserted that an additional 75 basis points of tightening is expected in the near future. In contrast, the common currency of Europe has been supported by remarks from European Central Bank officials indicating additional aggressive policy tightening. The most recent was ECB President Christine Lagarde, who repeated on Monday that the central bank will continue to raise interest rates rapidly to curb inflation, which remains excessively high. “President Lagarde has been among the hawks, so we are comfortable with our call for 50bp increases at the next two meetings,” strategist Joseph Capurso of Commonwealth Bank of Australia wrote in a client note, indicating that the euro might touch $1.1033 this week.
Elsewhere, the dollar fell 0.41 percent to 130.11 yen, retracing its gains from the previous two days. The dollar sank as low as 127.215 yen last week, its lowest level since May, ahead of a Bank of Japan policy review, as investors anticipated that the BOJ will begin to wind down its stimulus program. However, the BOJ’s policy remained unaltered, offering the dollar some relief. To extend the life of the yield curve control (YCC) mechanism, which pegs short-term rates at -0.1% and keeps 10-year yields in a band around zero, policymakers continue to modify policy. As a result, many continue to anticipate a hawkish move from the BOJ this year. “Clearly, the market considers the YCC policy to be well past its expiration date, and it’s only a matter of time – probably months rather than quarters – before the BOJ sounds the death knell on it,” said NAB’s Attrill, who believes dollar-yen will fall to 125 by the end of March. The period of yen weakness is quickly coming to an end. In the meantime, sterling closed the day at $1.2391, up 0.12% on the day. The Australian dollar increased 0.18 percent to $0.7041, while the New Zealand dollar jumped 0.27 percent to $0.6508.
Reuters: The South African rand fell on Monday as the U.S. dollar strengthened on global markets, with investors focusing on the South African Reserve Bank’s first interest rate decision of the year this week. The rand ZAR=D3 traded at 17.2050 per dollar at 15:25 GMT, 0.4% weaker than its previous close. The dollar strengthened by almost 0.3% against a basket of major currencies. The South African Reserve Bank (SARB) will announce its rate decision on Thursday, with 11 of 20 economists surveyed by Reuters forecasting a 50 basis point (bps) increase to 7.50%. Eight analysts predicted a 25 basis point increase, while one predicted no change. In accordance with analyst expectations, December consumer inflation fell to 7.2% year-over-year from 7.4% the previous month, but remained significantly above the central bank’s 3%-6% target range.
After this week, the majority of economists polled by Reuters anticipate no further rate hikes. Last week, the rand lost more than 1 percent against the dollar due to market concerns over a power crisis that has resulted in daily blackouts this month. The troubled utility Eskom announced in a statement on Monday that the outages would remain at “Stage 4” from 4 p.m. local time (14:00 GMT) to 5 a.m. and at “Stage 3” from 5 a.m. to 4 p.m. Almost half of Eskom’s nominal generating capacity of 46,000 megawatts (MW) is now offline due to breakdowns or repairs. Stage 4 requires the removal of up to 4,000 MW of capacity from the national grid, resulting in around six hours of daily power outages for many families.
The yield on the benchmark 2030 government bond went down 1 basis point on Monday, reaching 9.78%. The All-share index of the Johannesburg Stock Exchange closed 1.08% higher, reflecting gains in global markets.
Reuters: In the early hours of trade on Monday, European stock indexes rose marginally, bolstered by optimism that inflation may have passed its peak, as markets reduced their expectations for further Federal Reserve rate hikes. As markets in China, Hong Kong, Singapore, Malaysia, South Korea, and Taiwan were closed for the Lunar New Year vacation, overnight liquidity was low. At 09:47 GMT, the MSCI World Equity index was up 0.3% on the day, remaining just below its highs from the previous week. The European STOXX 600 and the London FTSE 100 both gained 0.2% on the day. Indications of decelerating inflation, declining commodity prices, and the loosening of China’s COVID-19 restrictions have bolstered expectations that the global economic slowdown may not be as bad as anticipated so far this year.
The money markets are pricing in a 98% chance that the Fed will raise rates by 25 basis points next month, and have slowly dropped the expected peak from the current 4.25% to 4.50% to 4.75% to 5.00%. Peter Chatwell, head of global macro strategies trading at Mizuho, stated that markets are currently being driven by the belief that U.S. inflation has reached its peak. “On the surface, it appears that inflation has been contained, and the most likely future course is downward. “My inflation outlook for the second half of the year remains cautious,” he added. Following an increase in Netflix and Alphabet shares, Wall Street rebounded late last week. The flash PMI statistics for the euro zone and the United States are expected to reveal less severe economic contractions than the previous month, according to Reuters polled analysts. It is anticipated that the data will improve more in Europe than in the United States.
At 101.59, the U.S. dollar index was down almost 0.3%. The euro was up 0.6% at $1.0918, having reached a nine-month high of $1.0927, aided by an easing of recession fears amid a drop in natural gas prices and hawkish remarks from European Central Bank governing council member Klaas Knot in a Sunday interview. The British pound rose 0.1% to $1.2409, while the Australian dollar, a liquid proxy for risk aversion, rose 0.6% to $0.701. The dollar strengthened versus the yen, rising 0.2% to 129.815 after fluctuating last week as the Bank of Japan bucked market pressure to tighten its ultra-lax monetary policy. The yield on the benchmark 10-year German bond was essentially unchanged at 2.19 percent. The price of Brent crude rose 0.5% and the price of U.S. crude rose 0.4%.