South African Rand

FX Daily: US bond market sets the FX tone

The ongoing sell-off in the US bond market continues to set the tone – not just for FX markets but for risk assets in general. A heavy slate of US Treasury auctions this week and rising concern over a US government shutdown on Saturday is sending implied volatility higher and may trigger some more profit-taking on carry trade strategies.

 

USD: Focus on Treasuries again

The dollar continues its grind higher and probably the biggest market talking point is the ongoing bearish steepening of the US Treasury curve. Speaking to our bond strategists, they think this is currently being driven by two factors. The first is the ongoing upward revision to where the Fed Funds rate settles after the next Fed easing cycle. Looking at the forward curve for one-month USD OIS rates, investors now see the low point in any future Fed easing cycle at around 4.00% in three years's time. Rather incredibly, at the start of this year, the market had seen the l

Australian CPI Expected to Rise to 5.2%: Impact on AUD/USD and RBA's Rate Hike Dilemma

US Dollar (USD) Continues To Trump The EUR, BoE Expected To Increase Interest Rates, SNB Remains Dovish, South African Rand (ZAR) Performance

Rebecca Duthie Rebecca Duthie 29.04.2022 09:52
Summary: The US Dollar strengthens further. EUR/GBP investor sentiment has not changed regardless of the BoE’s expected announcement on interest rates. CHF weakens due to SNB dovish approach to monetary policy. A short look into the ZAR. The Euro has spent the past week trying to recover against the USD. Over the past week the Euro has been weakening against the USD. This comes from the continuous strengthening of the US Dollar, the hawkish Federal Reserve Bank (Fed) ended last week announcing they would push interest rates up for the 7th consecutive week in their fight against inflation. The Euro has been struggling to fight against the strengthening USD, the European Central Bank (ECB) has not tightened their monetary policy to fight inflation, because of the risk averse sentiment of investors in the current market, many are fleeing the Euro and turning to the stronger USD. However, since the market opened this morning, the EUR has slightly strengthened against the USD, whether or not this will continue is uncertain, the market sentiment is mixed for this currency pair. EUR/USD Price Chart Read next: Euro (EUR) Continues To Weaken Against The US Dollar (USD), Euro Under Pressure Amidst Russia’s Decision To Tighten Gas Supplies. GBP Strengthens Against the JPY.  GBP Weakens against the EURO during the past trading week. Since the market opened this morning, market sentiment for this currency pair is bullish, this means that investors are expecting the EUR to strengthen against the GBP. Over the past week, the overall trend is showing the EURO strengthening against the GBP, however, the rise of the EUR has not been smooth, the chart below shows the volatility this currency pair has felt this week. The Bank of England (BoE) is expected to announce a rise in interest rates on Thursday in the fight against inflation, perhaps the GBP will start to see some strengthening against the EURO. EUR/GBP Price Chart Swiss National Bank As of the market open this morning the CHF has strengthened against the USD, however, the market sentiment for this currency pair is showing bullish signals. Over the past week the USD has been strengthening consistently against the CHF. As the Fed continues their hawkish approach to the fight against inflation through tightening monetary policy, the US Dollar continues to trump most of its currency counterparts. The Swiss National Bank (SNB) believes this rise in inflation is only temporary and continues to stand by their loose monetary policy stance. USD/CHF Price Chart South African Rand (ZAR) weakens against the USD. The ZAR is the National Currency of South Africa and is used by Swaziland, Namibia and Lesotho, in general the ZAR tends to strengthen when investors are willing to take on more risk in developing countries' economies. Given the current economic pullback, the ZAR has been weakening against the current aggressively strengthening US Dollar. USD/ZAR Price Chart Read next: EUR/USD Drops Below 1.07?!, GBP Weakens Against the EUR For The Third Consecutive Month, SNB Showing No Sign Of Tightening Monetary Policy  Sources: Finance.yahoo.com, poundsterlinglive.com, dailyfx.com.
CEEMEA FX Outlook 2023: The Situation Remains Fragile

CEEMEA FX Outlook 2023: The Situation Remains Fragile

ING Economics ING Economics 20.11.2022 11:51
The geographic and geopolitical situation has made this a difficult period for the region. However, things should normalise in the coming year. We expect global pressures to ease and central banks to drop their FX intervention approach. Nevertheless, the situation remains fragile and we remain vigilant Source: Shutterstock Make the FX market normal again Although it can be said globally that the last few months have been very complicated, the CEEMEA region and in particular the CEE4 have been clearly leading the way in this mess. The Covid years forced central banks in Central and Eastern Europe to start a global hiking cycle, and this year's events have compounded the burden on the region. In our view, the main shock is already over, but we are far from out of the woods and are only moving into the second stage – the aftermath. In addition to the standard drivers of FX, such as rate differentials and EUR/USD, the price of natural gas has now become a central theme for the CEE4 region. The coming winter will test the unity of the European Union with a shallow recession and central bank efforts to end record hiking cycles bringing further pain to FX. Moreover, twin deficits, which will remain with us for a longer period, do not play in the region's favour. Central banks have been forced to do more than just hike rates to ensure price stability and the CEE4 region has split into two camps: full FX intervention regimes (Romania and the Czech Republic) and hybrid defence (Poland and Hungary). To make matters worse, politics has also come into play, and in particular, the dispute between Hungary and Poland with the EU has weighed heavily on the forint and the zloty. As you can see, the cards are heavily stacked against the CEE region, and we carry all these themes into the next year. However, we believe that these issues will be addressed in 2023 and market conditions will begin to normalise. By far the biggest potential, in our view, is the Hungarian forint, which has suffered badly from the government's uncertain access to EU funds, full dependence on Russian energy, and the greatest sensitivity to a global sell-off. Therefore, with the calming of these issues, which we believe is only a matter of time, the hidden potential of the forint could be unlocked, outperforming its CEE peers. We see a similar story on a smaller scale in Poland. On the other hand, the Czech National Bank and National Bank of Romania have taken the path of keeping FX under control, leading to artificial overvaluation. In both cases, we expect a loosening of the central banks' approach in the first half of next year, which should lead to significant depreciation. Among the high-yielders, Turkish policymakers have used an array of unorthodox policy measures to limit weakness in the Turkish lira. The Turkish election in June will be a pivotal period for financial markets, and investors will remain wary that unchecked inflation could put pressure on the lira. In South Africa, the rand looks to have found some good buyers near the 18.50 area in USD/ZAR. Those levels could be tested again early next year should the Federal Reserve push real interest rates higher again, but as pessimism in the Chinese economy starts to fade in the second half of 2023, (the rand is very much driven by commodity prices and China’s performance) USD/ZAR could be trading well below 17.00. Finally, USD/ILS normally proves a good bellwether for the broad dollar trend. And the Bank of Israel might be slightly more tolerant of shekel strength in 2023. We target 3.00 for USD/ILS. Twin deficits - the new standard in the region Source: ING forecast EUR/PLN: Conditions to improve, zloty remains at risk   Spot Year ahead bias4Q221Q232Q233Q234Q23 EUR/PLN 4.70 Neutral 4.90 4.85 4.74 4.66 4.70 Valuation: Our relative value EUR/PLN model (gauging the exchange rate against other market variables, such as swap spreads, option volatility, etc) continues to point to the zloty still being some 3% undervalued against the euro. We attribute this to a mix of risks, both external, particularly the war in Ukraine and its economic fallout, and internal, specifically, tensions with the EU, elevated CPI risk and expansionary fiscal policy undermining the local currency bond market – Polish government bonds (POLGBs). Many analysts suggest another major Russian offensive may be due in the spring. If Russia simultaneously attempts to put economic pressure on the EU, this could again sour sentiment towards the CEE region. The prospect of the conflict coming to an end is a major unknown, but investors should at least become increasingly resilient to news about the war. External position: Fundamental backing behind the zloty should improve next year, but risks behind the local policy mix will rise. We expect the current account deficit to tighten from €35bn to €26bn, owing to e.g. a more favourable terms of trade. Poland is also likely to draw some €20bn from the 'old' EU budget. Moreover, the government finally decided to lean towards hard currency funding. All of this is likely to be converted via the market under the current Ministry of Finance's FX strategy – balancing the current account deficit. Also, FDI inflows should remain solid, already standing at a net €16bn in the first half of 2022. Year-end 2022 may prove more difficult, as refilling natural gas reserves may again prove costly. Politics: Domestic politics is a major unknown in 2023. The proximity of the October elections is a key risk for the fiscal consolidation the government recently unveiled to curtail weak POLGBs. The government is also attempting to reset relations with the EU – possibly encouraged by Hungary’s pro-EU turn. While reaching an actual compromise will take time (and may prove impossible ahead of the general elections), it is at least a move in the right direction and likely to improve the market perception of Poland. Moreover, opinion polls show increasing support for the EU-orientated opposition. A victory for them could prove supportive to the zloty, as investors would bet on swift access to the 'new' EU budget. EUR/HUF: Waiting for a forint breakout   Spot Year ahead bias4Q221Q232Q233Q234Q23 EUR/HUF 405.00 Bearish 400.00 390.00 380.00 385.00 390.00 Inflation: The forint's (HUF) underperformance is largely related to price pressures. Despite the anti-inflationary measures provided by the Hungarian government via price caps in basic food, fuel, and utilities, core inflation is the highest in the EU. However, we believe that the peak is close. Real wage growth dropped into negative territory from September, consumer confidence is close to a record low and a higher share of companies are complaining about a lack of demand rather than a lack of labour. These factors should tame the pricing power of companies. Thus, we see headline and core inflation peaking around the end of 2022 or early 2023. As soon as inflation starts to ease, inflation expectations will come down, so a forward-looking positive real interest rate will spur interest in the HUF. Monetary policy: The central bank stepped into Phase 3 of its tightening cycle in mid-October with an emergency move. New temporary targeted measures were introduced to maintain financial stability alongside the main goal of price stability. The effective rate is now defined by the one-day deposit quick tender, sitting at 18%. With further fine-tuning in the system, we see monetary transmission improving, with short-end rates rising further. In parallel, tightening via the squeezing of liquidity will continue. The exit strategy from the 'whatever it takes' stance will be triggered by materially improved risk sentiment (see next bullet). We think this could translate into a gradual convergence of the effective rate to the base rate, starting as soon as late December. Internal risks: As this policy turnaround will be triggered by a materially improved risk environment, we see a potential relief rally in the forint, despite some normalisation in interest rates. The two key elements of internal risks are the Rule-of-Law procedure and the current account imbalance. Regarding the former, we expect Hungary to settle the dispute with the EU, opening the door for EU transfers as soon as mid-December. This will eliminate a key barrier to HUF strengthening. We expect the country’s external balance to improve in the coming months as the recession and coming winter will dampen the country’s import needs, easing the systemic pressure on the forint. In our view, this could result in a 5% strengthening of the forint over the next six months. EUR/CZK: Koruna under CNB control   Spot Year ahead bias4Q221Q232Q233Q234Q23 EUR/CZK 24.30 Neutral 24.50 24.50 25.00 25.00 24.50 Monetary policy: The Czech National Bank left interest rates unchanged at 7.0% for the third consecutive meeting and we think the Bank has now ended its hiking cycle – the first central bank in the region to do so. The economy already posted a decline in the third quarter of 2022 and we believe it is heading into a shallow recession. Wage growth remains high but inflation below the CNB's forecast suggests a hawkish surprise is unlikely, in our view. The current account has plunged into a record deficit and, in relative terms, we forecast it will reach the largest deficit since 2003. Moreover, fiscal policy shows only marginal signs of consolidation, and so the Czech Republic joins the twin deficit club within the CEEMEA region. FX Interventions: The main topic for the Czech koruna in the coming months is the fate of the CNB's FX intervention regime. According to the central bank's figures, it has so far spent 16% of FX reserves from mid-May to the end of September. In our view, the CNB's activity in the markets has been zero in recent weeks, as confirmed by the Bank's board member Oldrich Dedek in a recent interview. Therefore, we see the CNB in a comfortable position and expect FX intervention to continue at least until the end of the first quarter next year with a line in the sand at 24.60-24.70 EUR/CZK. What next? For now, the koruna is clearly capped on the upside due to the presence of the CNB in the market, while we also see the pressure on the CZK from the global environment as gradually easing. Moreover, within CEE, markets see more interesting themes in Poland and Hungary and several CZK short squeezes have discouraged bets against the end of CNB FX intervention. Therefore, we expect EUR/CZK to trade slightly below the CNB's unofficial line and the koruna will return to the market's attention in the second quarter of 2023 when we think the topic of the CNB's exit strategy will return. EUR/RON: Focus on the 'managed' in managed float   Spot Year ahead bias4Q221Q232Q233Q234Q23 EUR/RON 4.91 Mildly Bullish 4.94 4.95 5.10 5.10 5.10 Hiking cycle: Having reached a key rate of 6.75% in November, the National Bank of Romania is either at or very close to the end of the hiking cycle. We narrowly favour no more hikes in 2023, though we admit that chances are high for another 25bp increase in January. The NBR’s commitment to firm liquidity management will likely – on average – keep carry rates above the policy rate. However, we see a good chance for the liquidity situation to improve substantially into year-end on the back of accelerated spending by the Treasury. Mopping up this liquidity is likely to take a good couple of months. Twin deficits: While on the budget deficit side, policymakers seem committed to reaching the 3.00% of GDP target in 2024 (with a 4.4% target for 2023), developments on the current account side are not encouraging. Due to unfavourable price developments in external markets (including the energy sector) but also on the back of robust GDP growth in the first half of 2022, the trade balance deficit will close well within double digits in 2022, possibly flirting with levels last touched in 2008 when it surpassed 16.0% of GDP. This represents a significant structural weakness that will keep pressure on the leu and require constant FX intervention from the central bank. Strong EU funds absorption will be key to balancing this imbalanced picture. Politics: The relatively eventless political scene in 2022 has been rather remarkable after years of political turmoil. As per the current coalition agreement, the PNL prime minister will resign in May 2023 and a PSD prime minister should be voted in by the same coalition. While there are no real signs of trouble currently, the impending 2024 electoral year still makes it somewhat hard to picture a completely serene change of power in May-June 2023. EUR/RSD: IMF acts as an anchor of stability   Spot Year ahead bias4Q221Q232Q233Q234Q23 EUR/RSD 117.30 Neutral 117.30 117.30 117.35 117.40 117.40 IMF: On 2 November, the IMF announced that a EUR2.4 billion 24-month Stand-By Arrangement (SBA) will replace the current Policy Coordination Instrument (PCI), subject to IMF Board approval in December 2022. The agreement will help to address “emerging external and fiscal financing needs”. On the external front, the IMF estimates the current account deficit to reach 9.0% of GDP in both 2022 and 2023 due to “sharply higher energy import costs along with shortfalls in domestic electricity production, as well as weakening external demand”. On the fiscal side, the initial 3.0% of GDP budget deficit target will be exceeded, most likely ending up around 4.0% of GDP. Summing up, the country needs financing, and the current choppy markets have made the IMF SBA look more appealing despite the strings attached. Monetary policy: Beyond the proposed reforms on the fiscal side, the SBA will undoubtedly shape monetary policy as well. The 2 November press release specifically mentions that “the macroeconomic policy mix should be tight to contain high inflation and support exchange rate stability” and “the ongoing monetary tightening is crucial to ensure that inflation does not become entrenched”. Essentially, we read this as a signal that the IMF is relatively comfortable with the current FX stability policy but that interest rates should continue to be increased. We revise our terminal key rate forecast from 4.50% to 5.75%, which should be reached in the first quarter of 2023. (Geo)Politics: While on the internal front, the April 2022 elections have settled things for some time, the regional developments – be it the war in Ukraine or the Kosovo car plates dispute – are making it more and more difficult for the country to sustain the ambivalent stance it has so far maintained. Absent more clarity, Serbia’s progress as a candidate country for EU accession might see little improvement in the short to medium term, which could dent its efforts to achieve the long-awaited investment grade status. USD/KZT: A defensive play on local fundamentals   Spot Year ahead bias4Q221Q232Q233Q234Q23 USD/KZT 460.00 Mildly Bullish 480.00 480.00 470.00 470.00 470.00 Scope for higher exports: The Kazakh tenge (KZT) depreciated 6% in the first 10 months of 2022, which is defensive given the geopolitics in the region and the 10-15% US dollar appreciation against major currencies. This is attributable to Kazakhstan’s stronger trade. Exports grew 48% year-on-year in the first nine months of 2022, and the current account is back to a $7.9bn surplus vs. a $5.6bn deficit in the first nine months of 2021. Oil production of 1.5m barrels per day is below the OPEC+ quota of 1.6m bpd, and the official target of 1.9-2.0m bpd, meaning there is scope for an increase in exports in 2023, assuming stable oil prices. Meanwhile, oilfield maintenance and an 85% dependence on Russian pipeline infrastructure are downside risk factors. The government is looking to reduce involvement in the FX market: The government is planning fiscal consolidation to reduce the breakeven oil price from a high $110-140 in 2021-2022 to a more comfortable $55-76/bbl to 2023-25. As a result, more FX oil revenues could be saved, reducing the gross spending of the sovereign fund to $7bn in 2023 from $9-11bn in 2021-22. However, the planned 3% GDP increase in non-oil revenues appears ambitious, and the actual conversion of FX oil revenues into KZT for state spending could be higher than officially planned in the event of non-oil revenue under-collection and higher than expected spending. Private capital flows remain uncertain: While the state capital flows, including the sovereign fund and foreign debt, are normally a mirror image of the current account, the private sector’s capital flows are subject to uncertainty. In the first nine months of 2022, private outflows (including unidentified operations) narrowed to $0.3bn vs. $3.8bn in 2021, in line with our expectations, due to the post-Covid recovery in corporate borrowing and the government’s capital repatriation measures. Continued capital inflows will require further progress in structural reforms, improvement in the global/regional risk appetite, and signs of a reversal in the nominal key rate trend, which is so far heading higher. USD/UAH: Central bank allows further depreciation   Spot Year ahead bias4Q221Q232Q233Q234Q23 USD/UAH 36.80 Neutral 40.00 40.00 38.50 37.70 37.00 Central bank: 2023 prospects for the hryvnia remain concerning. Analysts warn that the recent Russian mobilisation may prolong the conflict by at least several months. Moreover, the Ukrainian military progress may slow this winter after recent successes. This leaves the economy struggling with a massive trade deficit (US$5.4bn during the first eight months of 2023), largely reliant on international aid to shore up its FX reserves, currently at $25.2bn owing to a massive injection. However, while the scale of FX intervention has decreased markedly since its peak in July ($4bn), it remains considerable ($2bn in October). The very likely intensification of fighting in early 2023 may again push up the scale of FX intervention required to stabilise the currency. That is why we expect the central bank to allow for further depreciation of the hryvnia, possibly in the first half of 2023. Long-term view: The prospects for the Ukrainian currency largely hinge on the timing of an end to the conflict and the ensuing inflow of reconstruction aid. Various estimates indicate that the restoration may cost up to $750bn (or nearly four times the 2021 Ukrainian GDP). A fraction of this should suffice to drive USD/UAH lower, considering the costs of Ukraine’s FX intervention so far. New normal: Returning to pre-war USD/UAH levels is impossible, though. Given the massive damage to Ukraine’s infrastructure and means of production, the economy will for years remain dependent on investment-related imports. Even if those could theoretically be covered by inflows of foreign aid, the country will likely aim at maintaining a weaker hryvnia in order to support exports. USD/TRY: No relief in sight for TRY   Spot Year ahead bias4Q221Q232Q233Q234Q23 USD/TRY 18.60 Bullish 19.50 21.20 22.40 23.30 24.00 Central bank focus to keep financial conditions supportive: The Central Bank of Turkey (CBT) has delivered 350bp in cuts since August, pushing rates to 10.50%, while also signalling that the rate-cutting cycle will end in November at 9%. The reasoning behind the extension of the rate-cutting cycle at an accelerated pace remains the same. The CBT has cited the need for supportive financial conditions so as to preserve the growth momentum in industrial production and the positive trend in employment. Further signs of a slowdown in economic activity and the recovery in FX reserves since late July are likely factors for the cutting cycle. However, given tighter regulations on the asset side which selectively limit loan growth, cuts are not easing financial conditions quickly. Supportive fiscal stance and continuation of selective credit policy: The timing of the recently announced Credit Guarantee Fund package (reportedly at least TRY50bn) and any possible easing in macro-prudential regulations could reverse the recent momentum loss in lending ahead of elections, with the objective of further supporting domestic demand. Policymakers are also leaning towards a more expansionary stance on the fiscal side as the budget deficit, estimated in the Medium Term Program at 3.4% of GDP in 2022, has been rapidly increasing from c.1.4% in September. The budget deficit forecast for 2023 is 43% higher than this year's forecast. And we should not rule out a breach of this target as the elections approach – scheduled for June 2023. Inflation and external imbalances remain as major concerns: While the policy mix has tilted to a more supportive stance lately, sustained disinflation is not likely unless real rates are normalised. The recent steps are not sufficient to facilitate an external rebalancing which will be determined by the evolution of energy and gold imports. In this environment, TRY is likely to remain under pressure not only because of macro fundamentals but also because of the current unsupportive global backdrop. A recovery in FX reserves will be more challenging in this environment. USD/ZAR: Surprise fiscal outperformance   Spot Year ahead bias4Q221Q232Q233Q234Q23 USD/ZAR 17.20 Mildly Bearish 18.00 17.50 17.25 17.00 16.50 Some good fiscal news: For many years, the fiscal position has been the rand’s Achilles' heel, including the high-profile downgrade to junk status of its sovereign bonds in 2017 and their removal from key bond indices in the 2017-20 period. However, the October budgetary statement in parliament projected South Africa running a fiscal surplus next year and the country’s gross debt-to-GDP stabilising at lower and earlier-than-predicted levels. This has helped the sovereign five-year CDS retrace from the 360bp levels seen in late September. This suggests that if external conditions improve, the rand would be rewarded. Terms of trade will be key: As a high beta, EM commodity exporter, the rand is also very much driven by both commodity prices and China’s performance. Commodity prices and weak imports had helped South Africa’s current account position switch to a strong surplus in 2021 and early 2022. Into 2023, however, the South African Reserve Bank (SARB) forecasts the terms of trade declining 17% and the current account moving back into deficit. South Africa will also be playing its part in the energy transition as it switches from coal and the hope is that the nation’s electricity provider, Eskom, can find some stability if the sovereign assumes a big chunk of its debt. The profile: It seems as though international investors have started to find value in the rand when USD/ZAR trades at 18.50. We think it could trade there again into early next year if the Fed tightens US real rates still further. Yet the global stagflation story is well flagged and into 2023 we think investors could switch to a more reflationary mindset if it looks like the Fed is preparing to cut rates later in the year. Equally, it is hard to see investors remaining as pessimistic on China for the entirety of 2023. We therefore see USD/ZAR trading back to 17.00 and possibly even 16.00 as 2023 progresses. USD/ILS: Shekel well positioned when equities turn   Spot Year ahead bias4Q221Q232Q233Q234Q23 USD/ILS 3.40 Bearish 3.50 3.40 3.25 3.10 3.00 Equities a key driver: 2022 has proved a strange year for the shekel in that when the Bank of Israel (BoI) finally turned hawkish, and with good reason, the shekel sold off along with the rest of the EMFX complex. Recall that for many years the BoI had been battling shekel strength with a large FX intervention campaign. Apart from widespread dollar strength, it also does seem that the shekel is very much driven by equities. Here, declines in overseas (mainly US) equities markets drive margin calls to Israeli buy-side investors and generate shekel weakness. We tentatively expect this dynamic to reverse in the second quarter of 2023. Strong economy: The Israeli economy is expected to grow around 6% this year and 3% next year – even when the US and Europe are likely to be in a recession. Perhaps Israel should be warier of second-round inflation effects than most since the economy is operating above capacity and at full employment. However, the BoI hints that its tightening cycle might end around the 3% area and that inflation should come back into the BoI’s 1-3% target range by the end of 2023. The risks would seem to be skewed towards the BoI needing to tighten further. Why we like the shekel: Israel runs a 3%+ of GDP current account surplus, has strong domestic growth and a central bank not afraid to get involved in FX markets – meaning that shekel weakness will not be particularly welcome. In our experience, USD/ILS is always at the forefront of the dollar trend and if the dollar does turn in the first half of 2023 as we expect, USD/ILS should come a lot lower. Less concern over deflation by the BoI should mean that it will be more tolerant of USD/ILS breaking below 3.00 towards the end of 2023 – which could be the surprise. Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more  
Navigating Interconnectedness: Analyzing Banks' Exposures and Funding from Non-Bank Financial Institutions

FX: The EUR/HUF Cross Rate Continues Its Volatile Path, The South African Rand (ZAR) Is The Worst EMEA FX Performer

ING Economics ING Economics 13.12.2022 09:01
FX markets have been becalmed over the last two weeks as participants tidy up positions for year-end and await the next key input into the global macro stay. One such input will be received today in the form of the US November CPI release, where another soft 0.3% MoM core reading is expected. Its a big release and will set the tone for tomorrow's FOMC meeting A scandal involving South African President Cyril Ramaphosa is driving the rand underperformance USD: November CPI front and centre Traded levels of volatility for longer tenors (one month and three months) have been falling sharply over the last two weeks as the FX markets take a breather. Even though shorter-dated tenors price in plenty of volatility over the next week, the view seems to be that into the first quarter of next year, FX markets can continue to settle. That view will be challenged over the next 36 hours with the release of the November US CPI at 1430CET today and the Federal Open Market Committee (FOMC) tomorrow at 20CET. Given that last month's CPI release was a major trigger for the dollar sell-off, all eyes will be on today's figure. Our chief international economist, James Knightley, is forecasting the key core component at 0.3% month-on-month, the same as the consensus and the same as last month. James says the upside risk stems from shelter and Owners' equivalent rent not falling as quickly as consensus expects – it takes time for the decline in asking rents to feed into what is actually being paid. And downside risks come from used car prices again and whether medical costs stay soft after their technical fall last month. James says there will be more focus today on "services ex shelter" inflation, given that Fed Chair Jerome Powell highlighted that in a recent speech.  Today's release will set the dollar tone for tomorrow's FOMC meeting and into the first quarter of 2023. We think the market is being a little early in pricing 50bp of rate cuts for 2H23 and could see the dollar bouncing on any upside surprise in today's CPI data – including upward revisions to last month's reading. The data probably will not be a knock-out blow to the dollar – one way or the other – given tomorrow's big FOMC meeting including a new set of Dot Plots. Therefore plenty to play for over the next 36 hours. A DXY close above its 200-day moving average at 105.80 would be helpful in supporting our view that the dollar will be strengthening through 1Q23. Chris Turner EUR: Make or break As above, CPI and FOMC inputs into the dollar equation will be a key driver of EUR/USD into year-end and early 1Q23. If we were to pick out two levels, we would say the 1.0600/10610 area is key resistance. A close above that on a soft US CPI release would warn of a lot more pain into year-end and EUR/USD drifting up to 1.08 and even 1.0950/1.1000. On the downside, the 200-day moving average is now 1.0350 and would be a level any investors trapped long dollars at higher levels might choose to offload some dollars. Away from EUR/USD, the EUR/HUF cross rate continues its volatile path. News from Brussels last night is that there appears to be progress on the release of EU funds to Hungary. Investors have been here before with many false dawns, but it does indeed seem like progress is being made. As we discuss in our recently released Directional Economics, the Polish zloty, not the Hungarian forint, will probably be the market's target for scrutiny in 2023. Chris Turner GBP: Better jobs data gives the BoE a headache We have just seen the latest UK jobs data, where the November payroll increased more than double what was expected and the weekly earnings rate ex-bonus nudged up to 6.1% 3m/YoY, the highest in a year. This adds to thoughts of a full employment recession and supports some of the more hawkish pricing of the Bank of England (BoE) policy cycle. It is probably not enough to prompt the BoE into another 75bp hike on Thursday (a 57bp hike is priced) but will support sterling.  Today's UK data could light the fuse of a Cable rally, were US CPI data to oblige. Our prior has been that this rally stalls around this 1.2300/2310 area – but a close above here warns of another three to four big figures higher during thin, year-end markets. Chris Turner ZAR: President Ramaphosa faces proxy impeachment vote One might have expected the South African rand to be doing a little better over recent weeks. The dollar is weaker, the China re-opening narrative has prompted a rally in the industrial metals markets and seen South Africa's terms of trade improve markedly. But no, outside of the Russian rouble, the rand is the worst EMEA FX performer since 10 November – the release date of the soft US October CPI data. Driving that rand underperformance seems to be politics. President Cyril Ramaphosa has been caught up in a scandal, whereby an independent panel has concluded he might have violated the constitution in the way he handled the investigation into the theft of cash at his property. The findings of that panel will today be put to a vote in the South African parliament – seen as a proxy impeachment vote for Ramaphosa. The question is how many disgruntled members of the ruling African National Congress (ANC) party will join with the opposition in supporting the panel's finding. As above, we would have thought the rand would be trading a lot stronger were it not for this vote. But equally, if the vote goes through, USD/ZAR could easily be trading over 18.00 in thin December markets. In short, current levels near 17.50 may not last for long. Chris Turner  Read this article on THINK TagsSouth Africa FX Dollar Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more
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Forex: The South African Reserve Bank Meet Today And A Gawkish Statement Today Could Be Enough To Push The USD/ZAR Pair Back To The 16.90

ING Economics ING Economics 26.01.2023 10:17
Notable yesterday was the dollar selling off after the Bank of Canada said it was ready to pause/end its tightening cycle. Some in the market could be thinking the Fed is of a similar mindset. At the margin that suggests the dollar could go into next week's Fed meeting on the offered side. Today the focus is US 4Q GDP data and a rate decision in South Africa USD: Dollar can stay offered Trade-weighted measures of the dollar continue to edge lower. The catalyst for modest weakness over the last 24 hours has been the Bank of Canada's (BoC's) decision to pause and perhaps end its tightening cycle. The move saw US yields tick modestly lower and weigh on the dollar as investors considered whether the Federal Reserve was on the verge of adopting a similar position - perhaps at the 22 March FOMC meeting. Next week's Fed hike of 25bp looks locked in.  This all fits with the narrative of easing pricing pressures and a mild US recession, which could actually see the Fed easing and a weaker dollar stimulating Rest of World (RoW) growth. And the re-weighting of portfolios to RoW assets remains a key story for 2023.   For today, the data focus is on US 4Q GDP data. Our team forecasts a slightly below-consensus number and is mainly driven by lower imports and inventory building - not necessarily 'good' growth. We will also see the advanced goods trade balance for December which is expected to have widened again. Additionally, we will see the volatile durable goods orders for December and also the weekly initial jobless claims which so far are showing no signs of easing in labour market supply pressures. We are not sure that DXY is ready to break below support at 101.30 just yet. And we see next week's FOMC meeting as an upside risk to the dollar. But for the time being, expect DXY to stay offered in a 101.30-102.00 range. Chris Turner EUR: ECB blackout period finally arrives After a few wobbles, it looks like markets have finally got the message from the European Central Bank that it will be hiking by 50bp at both the February and March meetings. A further 40bp of tightening is then priced over the summer. We look for just one more 25bp hike in May which will take the deposit rate to 3.25%. The ECB now goes into a blackout period ahead of next Thursday's policy meeting - suggesting these tightening expectations may not move much further. With the market pricing a 50bp easing cycle by the Fed in the second half of the year, this combination leaves EUR/USD at the highs of the year above 1.09. As we mentioned on Monday, investors may struggle to push EUR/USD through the 1.0950/1000 area ahead of next week's FOMC/ECB risk events - though it looks like EUR/USD will stay bid.  One note of caution to the EUR/USD really, however, is that the EUR/USD risk reversal - the price investors pay for a euro call over a similar euro put option - is no longer shifting away from euro puts and in favour of euro calls. Perhaps this is a function of where the EUR/USD spot is. Yet this could suggest that investors and corporates see 1.10 as the top of a multi-month trading range. Chris Turner GBP: Peak rates? Sterling has been holding its own against the euro and the dollar. The biggest event risk for sterling over the coming months is when the Bank of England calls time on the tightening cycle. We are looking for a 50bp hike next week and then a 25bp hike in March to conclude the cycle at 4.25%. But presumably, at some point, the BoE will have to signal the top and we have already seen investors lose conviction over a peak in the cycle at 4.50%. The peak is now priced at around 4.37%. There is probably substantial short sterling positioning on the crosses in expectation of the turn in the BoE cycle. This makes for a bumpy ride. But overall we are happy with our end 1Q23 forecast for EUR/GBP at 0.89, which will probably leave cable trading towards the lower end of a 1.20-1.24 range. Look out for UK January CBI retail sales figures today - likely to confirm a downtrend on the back of weak consumer confidence and squeezed real incomes. Cable to trade well within a 1.2350-1.2450 range. Chris Turner ZAR: 50bp hike should help the rand Today sees the South African Reserve Bank meet to set interest rates. The majority of forecasters are looking for a 50bp hike to 7.50%, though a few are looking for a 25bp hike. Like many, the SARB is dealing with above-target inflation - now at just over 7% year-on-year versus the SARB's 3-6% target range. Markets price this hike as the last in the cycle and price the policy rate pretty flat at near 7% over the next three years.  Peak interest rates are music to the ears of bond investors and one of the best-performing asset classes this year is the EM local currency government bond index, currently up 4.2% year-to-date. South Africa still has a near 3% weighting in such an index, meaning that the rand should be a beneficiary should investors add to positions in EM local currency bonds. However, the rand has been underperforming this year and one would have expected the huge reversal in USD/CNY to be dragging USD/ZAR much below 17.00. That has not happened, perhaps because of the weak domestic demand outlook in South Africa amid ongoing challenges in energy supply. Yet a softer dollar environment and the China reopening story should remain a bullish cocktail for the rand and a hawkish SARB statement today could be enough to push USD/ZAR back to the 16.90 area. Medium-term, we are becoming a little more bullish on the rand. Chris Turner   Read this article on THINK Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more
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FX Daily: Dollar bears will have to be patient

ING Economics ING Economics 23.02.2023 10:47
Last night's release of the February FOMC minutes provided little comfort to dollar bears who were looking for signs that the Fed was increasingly buying into the disinflation/slowdown narrative. Yet the subsequent rise in US yields and strengthening of the dollar has been quite muted. It's a quiet day for data in the G10 space, but EM FX is interesting USD: FOMC minutes can keep the dollar supported Despite Federal Reserve Chair Jerome Powell sounding quite relaxed at the 1 February press conference and declaring that the 'disinflation process has started', the minutes of that meeting were largely hawkish. The consensus agreed that further rate increases were needed and that inflation remained unacceptably high. There were no hints of a pause and very little to divert market pricing of three more 25bp hikes from the Fed over the March, May and June meetings. This backdrop can keep the dollar supported in the near term and potentially into the 22 March FOMC meeting, where the debate will focus on whether the Fed Dot Plots will retain a median view of a 100bp easing cycle in 2024. For dollar bears, both activity and price data will have to soften over the coming weeks to make an impact on an otherwise hawkish Fed. The next set of meaningful US data is tomorrow's core PCE data for January - but even that is likely to see the core month-on-month reading rising to 0.4% from 0.3%. And for today, the market should not take too much notice of revisions to the strong fourth quarter GDP data -  driven by an inventory build and weaker imports. Our first quarter game plan is that DXY does not hold onto these gains. But for the time being, it looks like DXY wants to probe higher to the 105.00 area with outside risks this quarter to the 106.00/106.50 area. Chris Turner EUR: PMIs drowned out by hawkish Fed The better run of European PMIs earlier this week has rather been drowned out by the hawkish Fed. And actually, the German Ifo proved something of a reality check, where the current assessment of business conditions continued to deteriorate. The good news for EUR/USD is that the re-pricing of the European Central Bank cycle has nearly matched that of the Fed - meaning that the two-year EUR:USD swap differential has not substantially widened in favour of the dollar. In fact, it was interesting to read in the FOMC minutes - under the market developments section - that the Fed felt it was interest rate differentials and the improved Rest of World growth prospects that had been weighing on the dollar into January. These are the factors we have been using in our scenario analyses.  For the short term, EUR/USD remains soggy and it is hard to rule out a break under 1.0600 towards the 1.05 area. Our game plan remains that 1.04/1.05 could now be some of the lowest EUR/USD levels of the year - but it feels like EUR/USD could trade on the offered side for a few weeks yet. Chris  Turner EUR/SEK has seemed to find support at the key 11.00 level for two consecutive sessions after rising bets on Riksbank tightening had put pressure on the pair. We could see a temporary break below 11.00, but our view is that a sustained SEK rally is premature. Our short-term fair value model shows how there is no risk premium left on EUR/SEK: in other words, markets have priced out the risk of a collapse in the housing market in Sweden and a consequent slump of the whole economy. While hawkish Riksbank rhetoric is helping the krona, markets may have moved too quickly on the optimistic side. Upcoming data may underpin the rising risks to the Swedish economy, and could trigger a rebound in EUR/SEK before a sustainable move below 11.00 can materialise - we think from the end of the second quarter onwards. Francesco Pesole GBP: BoE's Mann speaks today Sterling is just about holding onto Tuesday's gains when strong PMI data triggered a sharp re-pricing of the Bank of England curve. Markets now price a further 50bp of BoE hikes by June - taking the Bank Rate to 4.50% - and the policy rate being kept there until early 2024. For today, the focus will be on a speech at 1030CET by the BoE's Catherine Mann. She speaks at the Resolution  Foundation on 'The results of rising rates: Expectations, lags and the transmission of monetary policy'. This sounds like it could be a dovish speech - i.e. let's pause and see what prior tightening has done. However, she is a hawk and with no clear signs of an easing in tight labour market conditions we doubt she will want to knock the current market pricing of the BoE cycle. We think EUR/GBP probably traces out a 0.8750-0.9000 range for the first half of the year, while cable should find support under 1.20. Also - whisper it. Sterling offers quite attractive risk-adjusted yields in the G10 space. Chris Turner ZAR: Seeking alpha There is much talk of 'stock-picking' or 'seeking alpha' this year as financial markets may no longer be purely risk on/risk off. In other words, local stories are having a greater bearing and that is certainly true in the EM FX space. We are no longer looking at the kind of homogeneous returns driven purely by the Fed/China story.  Here we will quickly look at two topics. The first is that some emerging currencies are lagging as politicians start to resist high interest rates and question central bank independence. This has been a loose fear in Brazil with the new Lula administration questioning whether the central bank needs to lift its inflation target. The Brazilian real has lagged gains in EM FX this year and we expect it to continue underperforming. More surprising have been events in Israel, where the Foreign Minister heavily criticised the central bank for hiking rates 50bp on Monday. Normally an outperformer, the Israel shekel was hit hard on the news and the Israeli government has spent the rest of the week trying to re-affirm the independence of the central bank. We like the shekel and see USD/ILS trading back to 3.30/3,40 later this year. But we will now have to watch political developments closely. Meanwhile, the South African government yesterday announced a major financial support plan for state utility, Eskom. The plan has been greeted well by Eskom bondholders, though the support means South Africa's sovereign debt to GDP profile deteriorates. The South African rand has been an underperformer this year and near 8% implied yields through the three-month forwards and the China recovery story have not been enough to provide support. We think investors will continue to pause for thought before chasing yields in the rand. For those investors wanting to take exposure in EM FX, we continue to think the Mexican peso remains attractive. It has one of the highest risk-adjusted yields in the EM FX space (implied yields corrected by implied volatility from the FX options market) and the Mexican sovereign trades on a narrower CDS than most after Mexico refused to add on debt during the pandemic. USD/MXN looks biased to the 18.00 area. Chris Turner Read this article on THINK
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FX Daily: Dollar Bears Urged to Be Patient as Dollar Reconnects with Rate Differentials

ING Economics ING Economics 24.07.2023 09:26
FX Daily: Dollar bears being asked for patience Quiet summer markets are seeing dollar pairs consolidate in new, slightly lower ranges. It will be another quiet session today ahead of a big week for G3 central bank meetings. Dollar bears may find some reassurance from emerging markets, where the PBoC is trying to limit USD/CNY gains and the South African rand is holding up despite the lack of a rate hike.   USD: Dollar reconnects with short-term rate differentials As my colleague Francesco Pesole has been writing this week, the dollar has made a modest comeback as both US yields adjust higher and short-term rate spreads stay in the dollar's favour. In fact, one could argue that the dollar should even be a little higher given that two-year US yields have retraced about 50% of their drop in the first half of July and the DXY has only retraced one-third of its losses. Price action over the past week probably shows that a switch to the disinflation trade will not be easy and will require a constant drip feed of supporting evidence – be it softer price or weaker activity data. Yesterday's drop in US initial claims clearly did not help here. Casting around the world in quiet FX markets we see the People's Bank of China (PBoC) continuing to fight a weaker renminbi by printing lower USD/CNY fixings than model-based estimates suggest. Despite credible calls for a lower renminbi to support growth and battle deflation, it seems Chinese policymakers prefer to keep renminbi losses contained and prevent a 'sell China' mentality building. The PBoC's battle against a stronger USD/CNY is a slight dollar negative in quiet summer markets – especially should it extend to outright dollar sales. Today's session should be a quiet one as the market prepares for US Federal Reserve, European Central Bank and Bank of Japan (BoJ) meetings next week. Regarding the BoJ, expectations of any Yield Curve Control policy tweak seem very low (perhaps too low) given that the 30-year Japanese government bond (JGB) yield is drifting lower and the forward market prices 10-year JGB yields at 50bp in three months and at only 55bp in six months. These 10-year yields should be priced a lot higher were the market expecting a policy change. USD/JPY may well drift to the 141.15/142.00 area before next Friday's BoJ meeting.
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FX Daily: Dollar Bears Urged to Be Patient as Dollar Reconnects with Rate Differentials - 24.07.2023

ING Economics ING Economics 24.07.2023 09:26
FX Daily: Dollar bears being asked for patience Quiet summer markets are seeing dollar pairs consolidate in new, slightly lower ranges. It will be another quiet session today ahead of a big week for G3 central bank meetings. Dollar bears may find some reassurance from emerging markets, where the PBoC is trying to limit USD/CNY gains and the South African rand is holding up despite the lack of a rate hike.   USD: Dollar reconnects with short-term rate differentials As my colleague Francesco Pesole has been writing this week, the dollar has made a modest comeback as both US yields adjust higher and short-term rate spreads stay in the dollar's favour. In fact, one could argue that the dollar should even be a little higher given that two-year US yields have retraced about 50% of their drop in the first half of July and the DXY has only retraced one-third of its losses. Price action over the past week probably shows that a switch to the disinflation trade will not be easy and will require a constant drip feed of supporting evidence – be it softer price or weaker activity data. Yesterday's drop in US initial claims clearly did not help here. Casting around the world in quiet FX markets we see the People's Bank of China (PBoC) continuing to fight a weaker renminbi by printing lower USD/CNY fixings than model-based estimates suggest. Despite credible calls for a lower renminbi to support growth and battle deflation, it seems Chinese policymakers prefer to keep renminbi losses contained and prevent a 'sell China' mentality building. The PBoC's battle against a stronger USD/CNY is a slight dollar negative in quiet summer markets – especially should it extend to outright dollar sales. Today's session should be a quiet one as the market prepares for US Federal Reserve, European Central Bank and Bank of Japan (BoJ) meetings next week. Regarding the BoJ, expectations of any Yield Curve Control policy tweak seem very low (perhaps too low) given that the 30-year Japanese government bond (JGB) yield is drifting lower and the forward market prices 10-year JGB yields at 50bp in three months and at only 55bp in six months. These 10-year yields should be priced a lot higher were the market expecting a policy change. USD/JPY may well drift to the 141.15/142.00 area before next Friday's BoJ meeting.
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FX Daily: Dollar to Stay Supported into the Fed, DXY to Trade in 101.00-101.50 Range

ING Economics ING Economics 26.07.2023 08:38
FX Daily: Dollar to stay supported into the Fed Fed day has arrived. A 25bp hike is widely expected and it looks far too early for the central bank to soften up its FOMC statement by embracing recent disinflationary trends. This should see the dollar holding onto some of its modest gains made over the last week. Elsewhere, the EM and commodity complex will want to be fed more news on China stimulus.   USD: Dollar to hold gains A look at FX performance over the last five trading sessions provides a good insight into the market's mindset and echoes the themes we highlighted yesterday of European pessimism and Chinese optimism. In the G10 space, the dollar has been the strongest currency but able to withstand that modest dollar strength the best has been the commodity complex of the Australian and Canadian dollars, plus the Norwegian krone. Underperforming has been the euro, with EUR/USD down 1.3% over the week. Indeed, we have seen independent euro weakness on the back of the soft PMI data and European Central Bank (ECB) lending survey. In the EM space, a similar story is playing out. Outperforming is the renminbi and its two most correlated currencies in the EM space, the South African rand and the Brazilian real. Underperforming on the back of the weak European story are the Hungarian forint and the Czech koruna. Also underperforming is the Chilean peso, where the central bank has recently announced a programme to replenish sorely depleted FX reserves. Important drivers of the FX story near term will therefore be whether the Federal Reserve stays hawkish, whether the ECB stays hawkish in the face of softening data and whether Chinese authorities follow through with detailed and sufficiently powerful stimulus to see the commodity currencies hold onto recent gains. Regarding the Fed, we think it is too early to remove key language from its statement that further tightening may be appropriate after today's 25bp hike. And we wonder whether it wants to push back against the 100bp of easing priced in for 2024. We see the Fed event risk as a mildly positive one for the dollar. DXY to trade 101.00-101.50 into the Fed, with risks of a breakout to 102.00 today.
US Bond Market Sell-Off Sets Tone for FX and Risk Assets

US Bond Market Sell-Off Sets Tone for FX and Risk Assets

ING Economics ING Economics 26.09.2023 14:48
FX Daily: US bond market sets the FX tone The ongoing sell-off in the US bond market continues to set the tone – not just for FX markets but for risk assets in general. A heavy slate of US Treasury auctions this week and rising concern over a US government shutdown on Saturday is sending implied volatility higher and may trigger some more profit-taking on carry trade strategies.   USD: Focus on Treasuries again The dollar continues its grind higher and probably the biggest market talking point is the ongoing bearish steepening of the US Treasury curve. Speaking to our bond strategists, they think this is currently being driven by two factors. The first is the ongoing upward revision to where the Fed Funds rate settles after the next Fed easing cycle. Looking at the forward curve for one-month USD OIS rates, investors now see the low point in any future Fed easing cycle at around 4.00% in three years's time. Rather incredibly, at the start of this year, the market had seen the low point for Fed Funds in three years' time down at 2.70%. The second factor weighing on Treasuries is this week's $134bn auction of two, five and seven-year notes – which takes place over the next three days. This comes ahead of a potential US government shutdown this Saturday, where hard-right Republicans in the House seem to be holding out against a stop-gap spending bill. In the background remains a threat of another downgrade of US sovereign rates on the back of an 'erosion of governance'. Apart from the rise in US yields, we have now started to see a rise in implied volatility in the US Treasury market. This will prove a headwind to carry trade strategies and could prompt the unwinding of some of the most heavily invested positions. We would worry about the Mexican peso here, which also faces Banxico unwinding its dollar forward book in less than benign conditions. Another popular target currency in the carry trade – the Hungarian forint – may actually find some support from the local central bank today (see below).  In general, however, the continued rise in US yields is making for a less benign environment and favours risk reduction. Whilst higher US yields may push USD/JPY close to 150, they also increase the risk of an equity setback. That is why we think an instrument like the one-month USD/JPY downside risk reversal may be too conservatively priced. And in general, we would say commodity currencies remain vulnerable, especially those like the South African rand and Latam currencies – this latter group were hit hard during the early August sell-off in Treasuries. DXY can probably stay bid through this if activity currencies come under pressure and technical analysts will be dusting off calls for a move to the 107.20 area.

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