Forex news reveals the Rand was steady at its previous close on Wednesday, even though March’s inflation rate fell slightly below forecast, though not enough to meaningfully change an expected trajectory for interest rates.
Forex news: Rand holds against USD
The rand stopped at 19.0475 rand against the dollar at 1516 GMT and the U.S. dollar fell 0.14% against a basket of six major international currencies.
Headline inflation fell to 5.3% year-on-year from 5.6% in February, below the 5.4% that economists polled by Reuters Forex news expected, but still too high for the Reserve Bank to consider cutting interest rates anytime soon.
Goldman Sachs said in a note that the bank forecast headline inflation would stay between 5.0% and 5.5% year-on-year into August due to rising oil prices and a weaker currency.
Forex news: Core inflation to fall
In other forex news, while core inflation is expected to fall to around the 4.5% target midpoint imminently, more meaningful disinflation will wait until the fourth quarter as supply disruptions ease and the rand stabilises.
In other forex news, South African retail sales in February also underperformed forecasts, falling 0.8% year-on-year after a revised decline of 2.0% in January, Statistics South Africa said.
Forex Trading Highlights: Good News, First Fed Rate Cuts
And the yield on South Africa’s benchmark 2030 government bond fell by 15.5 basis points to 10.705%, as yield complexes across maturities rose.
The Johannesburg stock market traded flat as well, with its Top-40 and broader all-share indices ending the day unchanged.
Meanwhile, the dollar pulled back from its recent five-and-a-half-month highs on Wednesday as Fed officials, including Fed chair Jerome Powell, said that any guidance for a rate cut would be dependent on upcoming data and that the Fed’s stance had no changed.
Forex news: Deep rate cuts
That implied that monetary easing expectations for world central banks are likely to be steady.
US central bank chiefs held back from hinting at deep rate cuts on Tuesday, instead calling for a ‘patient’ period of tight monetary policy after recent data showed that the US economy was in better shape than expected.
This comes after investors had ratcheted back their expectations for future interest rate cuts.
Soaring tensions in the Middle East for a time propped up the dollar as a safe-haven currency.
Forex news: Inflation rises
When US consumer price inflation came in hotter than expected last week, the market quickly adjusted its expectations that the Fed would now deliver a total of just under two quarter-point rate cuts in 2019, starting potentially in September.
And it’s that particularly hawkish view of interest rates that has propelled US yields higher and suggests a stronger dollar for the moment as the market stabilises.
In spite of a dip of 0.14% in its dollar index – its gauge against six major counterparts – euro prices rose 0.2% to $1.0638.
Jane Foley, an analyst at Rabobank in London, is one of those with a strong dollar bet who argue that safe-haven flows will boost the greenback should tensions over the Middle East escalate.
Foley thinks that the euro/dollar rate could still reach 1.05.
Forex news: Currency trends
As these trends continue to develop, the US and its allies are reportedly mulling a new round of sanctions against Iran in retaliation for its attack on Israel this week, the first of its kind, and that country’s war cabinet is meeting to consider their response.
Forex news: ECB headed for rate cut
European policymakers at the ECB are similarly marching towards a rate cut in June, with inflation set to recover to 2% by next year, even if price trajectories remain uncertain.
In Japan, the yen ticked up 0.3% to 154.67 per dollar, continuing near the weakest since October 1982. There appears to be a new reference level for thinking about intervention in the Japanese yen.
The market indicates an increased possibility of BoJ intervention to defend the yen at 155, but action could come at any point at all.
Forex news: Yen is falling
The thinking is that if the yen is falling steadily and on the basis of fundamentals, the chance for intervention remains low, with more focus on the pace of currency moves rather than those at specific levels.
Forex news: Pound hits seven-weak high
Sterling hit a new seven-week peak against the euro, and appreciated slightly against a slightly weakened dollar, after British inflation data on Wednesday suggested the Bank of England (BoE) could slow its monetary loosening. UK consumer prices index slowed to 3.2% year-on-year in March from 3.4% in February.
It was the lowest rate in 27 months. However, it was still above the market forecast.
Although the dollar sagged slightly after reaching a 5½-month peak yesterday, it still remained above the recent 5½-month high.
Forex news: US Federal Reserve Interest Rate Decision
US Federal Reserve officials were adamant that interest rates would probably stay higher for longer after the central bank raised them by another 50 basis points this week.
Sterling rose 0.35% against the dollar to trade at $1.24 and rose 0.16% against the euro to 85.30 pence, approaching its mid-March peak of 85.21 pence.
And while having the two main and core inflation measures fall to the lowest levels since late 2021 overall, data that Ebury’s head of market strategy Matthew Ryan said could hint at caution from the BoE’s Monetary Policy Committee over clinging services inflation.
After today’s report, ‘we remain open to the possibility of a more dovish policy this summer, but today’s data has certainly muddied the water’.
Faced with a tight labour market and recent energy price spikes, analysts had thought that the BoE might lag the European Central Bank and the Fed in cutting rates.
Forex news: Fed policy
In the past few weeks, markets have veered 180 degrees, and now price in the BoE’s first rate cut by September, and an ECB rate cut by June, as well as a relaxation of Fed policy in the fourth quarter.
Another reason analysts have said the BoE trajectory might be less aggressive than that of the E Labour government might mean more public spending and a threat to financial stability.
Forex news: Chinese firms stockpiling dollars
Chinese firms are stockpiling dollars in the expectation that the yuan will lose further ground, which, amid chaotic stock markets and a slowing economy, it indeed has been.
The dynamic, in turn amplified by the dollar’s growing interest return, is causing a buildup in foreign exchange deposits.
At the PBOC, such deposits rose by $53.7 billion since September to $832.6 billion.
To break the process, analysts say that either major interest rate cuts by the Federal Reserve are required or the yuan needs to find a bottom.
Neither seems likely in the near future.
As of this writing, the yuan has lost another 1.9% this year against the dollar, dropping almost 5% from around 6.7 to 7.24 per dollar.
Rather than bring their earnings home, Chinese exporters are leaving them in dollar accounts abroad, which pay as much as 6%, compared with 1.5% for yuan deposits.
The ‘positive yield spread between the US and China deposits is now the biggest since 2007’, wrote Alvin Tan of RBC Capital Markets.
When exporters do bring dollars home, many get stuck with a deposit rate of 2.8% at big Chinese banks.
More popular dollar-denominated investments can pay as much as 4.4%.
Of course, given the strength of US economic data recently, the next Fed cut is being pushed back to late 2024, which should keep dollar demand robust.
The yuan could fall as low as 7.3 per dollar, a former level of support, before exporters begin to bring back some of their dollar holdings, believing that the PBOC could hold the line there.
That’s the point where some of its larger corporate clients are likely to think of paring dollar holdings, says a Shanghai-based banker.
If this suggests currency games are being played, the yuan’s depreciation has, at least, been comparatively mild.
It has not been quite as bad as the 9% drop in the Japanese yen so far this year, and that has eroded some of China’s trade competitiveness and trimmed its goods trade surplus 11% last year.
The FX settlement ratio, which looks at how much export receipts get converted to yuan, was 51% in February; companies essentially keep their dollars.
Forex news: ECN expectation
Amid stubbornly high inflation and temperamental financial markets, ECB officials are sticking to their rocks for a planned cut in interest rates in June, which continues to be the monetary authorities’ baseline expectation.
There remains less agreement, however, about whether these rates, and monetary policy in general, will be cut once or if interest rates remain stable once more.
The ECB is poised to cut on 6 June but, beyond that date, it is increasingly unclear.
Volatile price movements and a possible delay in cuts by the US Federal Reserve make it more difficult to predict the next moves by the ECB.
Joachim Nagel, president of the Bundesbank, has unflinchingly backed the June cut, and Piero Cipollone, an ECB board member, has left the door ajar for more cuts if, as he put it at an IIF forum in Washington, the data justify an easing of inflation towards the target.
What does that data need to show to clear the way for more cuts? Well, Cipollone explained, it depends on the available information next June and July.
If the economic activity surveys or core inflation are ‘back against the target’ – Cipollone’s words – ‘it is obvious we can relax further’.
Yannis Stournaras at the central bank of Greece and Gediminas Simkus at Lithuania were the most upbeat, suggesting a cut in July, but others such as ECB president Christine Lagarde have focused only on the June meeting, presumably for good reason.
Nagel took a prudent line.
He said: ‘If the economic data support it, and it looks that way at the moment, then a June cut is something I would vote for. But we’ve just seen some disconcerting data out of the US that make me wonder whether inflation is going to come down again to our target, as we’re hoping that it will.’
Financial markets are pricing in three ECB cuts this year – in June, September and December – down from earlier expectations of as many as five. Commodity prices were also singled out by both Cipollone and Nagel as a cause for concern, given the heavy energy dependency of the eurozone.
ECB executive board member Philip Lane’s stand-in, Cipollone, repeating that line about inflation, argued that: ‘It is possible that inflation can stay a bit higher than that for a while, before really moving back to our target of 2% by the end of 2025.’
Cipollone also commented on fears in the productivity statistics that the decline might not reverse once growth resumes, implying that it’s the result of firms retaining staff in a near-recessionary period, something expected to be corrected as employment level off with growth.
