South African rand weakens ahead of Fed decision

British Pound

Reuters: The pound rose on Tuesday, supported by data that showed UK wage growth picked up more than expected in the three months to October, which in turn raises the chances that the Bank of England will not rush to cut rates next year. Average weekly earnings, excluding bonuses, were 5.2% higher in the three months to the end of October than a year earlier, the Office for National Statistics said. A Reuters poll of economists had mostly forecast a rise of 5.0%. Sterling was last up 0.1% at $1.2693, having bounced from an earlier session low of $1.26685.

The BoE will announce its decision on monetary policy on Thursday and markets expect rates to remain at 4.75%. Looking further out, money markets show traders expect the BoE to cut rates by around 70 basis points next year, compared with expectations for roughly the same scale of cuts from the U.S. Federal Reserve and around 120 bps in cuts from the European Central Bank. The "higher for longer than elsewhere" theme has been a key driver of sterling strength this year, meaning the pound is the best-performing major currency against the dollar in 2024.

Even though it has fallen 0.3% in the year to date, it is still well ahead of the offshore Chinese yuan, the runner up, with a loss of 2.3%. Against the euro, the pound is up around 4.5% in 2024. Benchmark 10-year UK government bond yields have risen by almost a full percentage point this year, compared with a 54-bps rise in 10-year Treasuries and with a 20-bp rise in German 10-year yields. That said, there are cracks appearing in the UK economic picture. Recent data has shown the UK economy suffered a second month of contraction in October, while the employment market is weakening, with employers cutting staffing and job vacancies dropping.

"In the longer term, although wage data was stronger than expected, we think that the economic backdrop is weakening, which will lead to a loosening of the UK labour market over the course of 2025," XTB research director Kathleen Brooks said. "Thus, there is a risk that the market is currently underestimating the chance of rate cuts from the BOE next year," she said.

US Dollar

Reuters: The U.S. dollar held steady against the yen and other major rivals on Wednesday as investors waited to see whether the Federal Reserve will deliver a hawkish cut before the Bank of Japan and other central banks meet this week. The Fed is widely expected to deliver a 25-basis-point interest rate cut at the end of its two-day policy meeting on Wednesday, with markets pricing in a 97% probability, according to the CME's FedWatch tool. Focus will fall on policymakers' new economic projections for the upcoming year released alongside the decision, namely how much further Fed officials think they will reduce rates in 2025.

Given the string of robust inflation and activity data, the Fed may signal a slower pace going ahead, revising projections to indicate three cuts in 2025 instead of the current four, Tony Sycamore, market analyst at IG, wrote in a note to clients. The U.S. dollar index, which measures the greenback against six rivals, was little changed, down 0.04% at 106.89 after hitting its highest since Nov. 26 at 107.18 on Monday. Against the yen, the dollar was up 0.12% at 153.65, having given up some of its recent gains in the previous session as U.S. Treasury yields dipped ahead of the Fed's decision.

Markets have significantly reduced bets the Bank of Japan will raise rates on Thursday in favour of a January hike following a slew of media reports indicating the bank may take a cautious stance. Japan's exports rose for a second straight month in November, data showed on Wednesday. The Bank of England is also expected to hold rates steady on Thursday. Investors further reined in bets on cuts next year after data on Tuesday showed British wage growth picked up more than expected.

Sterling was nearly flat at $1.27095 ahead of CPI figures for November scheduled for release later in the day. The euro sat at $1.0502, up 0.09%. Among other central banks meeting this week, Sweden's Riksbank is seen cutting rates by as much as half a point, while the Norges Bank will likely leave rates unchanged. The Swedish crown held at 10.9469. The Norwegian krone hovered around 11.1793 against the greenback. Elsewhere, the offshore yuan traded at 7.2885 per dollar, not far from a 13-month low touched against the dollar on Tuesday amid dour expectations for Chinese economic growth.

The Australian dollar, which tends to act as a liquid proxy for the yuan, dipped 0.17% to $0.6326 against the greenback, its lowest since November 2023. The kiwi fetched $0.57565, up 0.04%. In cryptocurrencies, Bitcoin fell 0.54% to $105,836.57 after hitting a high of $108,379.28 in the previous session.

South African Rand

Reuters: South Africa's rand slipped against a stronger dollar on Tuesday, as investors turn their attention to the Federal Reserve's interest rate decision. At 0820 GMT, the rand traded at 17.93 against the greenback, about 0.4% weaker than its previous close. The dollar index was last trading up about 0.2% against a basket of currencies. The Fed will announce its interest rate decision on Wednesday, with markets expecting a 25 basis point cut, but the focus will also be on the central bank's tone on rates for the year ahead.

"A conservative tone will likely support the USD and pressure EM (emerging market) currencies, including ZAR," said Andre Cilliers, Currency Strategist at TreasuryONE. On the stock market, the Top-40 index was down about 0.9%. South Africa's benchmark 2030 government bond was slightly weaker, with the yield up 1 basis point at 8.93%.

Global Markets

Reuters: Stocks stalled while the dollar drifted higher on Wednesday as investors made last-minute adjustments to portfolios in the countdown to the year's final salvo of central bank meetings, while news of a potential Nissan-Honda tie-up lifted car stocks. S&P 500 futures were flat in the Asia session after the index fell in U.S. trade. European futures and FTSE futures were about 0.2% lower. MSCI's broadest index of Asia-Pacific shares outside Japan was huddled near a two-week low and had inched 0.2% higher by afternoon.

The dollar strode to a one-year high against the Australian dollar and a two-year top against the New Zealand dollar as expectations firmed for the Federal Reserve, later on Wednesday, to signal a cautious approach to rates in 2025. Traders are almost certain the Fed will move the funds rate window 25 basis points lower - from its current 4.5-4.75% range - but lift its long-run interest rate projections. "The market reaction is likely to focus on the communication and potential guidance for further cuts," said David Doyle, head of economics at Macquarie. "We foresee a hawkish shift in the dot plot, consistent with the movement in market expectations since the last update in September."

Then, Fed members' median projection for rates was for 3.4% at the end of next year and for a long-run neutral rate of 2.9% - well below current market estimates for a long-term neutral rate of around 3.8%. Traders have been driving up U.S. yields and the dollar accordingly, with benchmark 10-year yields touching one-month highs around 4.4% overnight, before settling at 4.39%. Moves in the Asia session were small, muted by the upcoming Fed meeting and central bank meetings in Japan, Britain, Norway and Sweden on Thursday. But currency markets reflected the dollar's broad strength, with the Australian dollar slipping to $0.6313 and the New Zealand dollar down to $0.5735.

The euro was under pressure at $1.0502 and the yen dipped slightly to 153.6 per dollar. The brightest spot in the Asia session was Japan's auto industry. A record 24% jump in Nissan shares led gains as investors cheered the prospect of consolidation bringing down costs. Shares in Honda, whose market cap is five times larger than embattled Nissan, fell 1.6%. The companies are in talks to set up a holding company, according to a person with knowledge of the matter, a move that would allow them to share more resources. Both said no merger had been announced but investors cheered the prospect as margins have come under intense pressure from Chinese electric vehicles.

Mitsubishi Motors, in which Nissan is the top shareholder, jumped 20% while Mazda gained 4%. French automaker Renault owns about 36% of Nissan, according to LSEG data. Sterling was also a standout and steadfast as an unexpectedly big surge in British wages has watered down expectations for interest rate cuts. At $1.2700 it is flat for the year and the best performing G10 currency against the dollar, while it is also within range of post-Brexit vote highs on the euro. The gap between 10-year gilt yields over German bund yields hit its widest since 1990 on Tuesday and is wider than the gap between U.S. rates and bunds.

"Given the political and growth woes of the Eurozone, we don't expect sterling to weaken much against the euro," said Kit Juckes, strategist at Societe Generale, though he doesn't see the euro falling dramatically on the cross either. Weak economies in Germany and China weighed on oil prices, keeping Brent crude futures at $73.27 a barrel. The rise in yields has kept a lid on gold which was trading at $2,644 an ounce. Bitcoin pulled back from near record highs to trade at $103,633.

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