As recently as a week or two ago bad news had been good news as far as our exchange rate went, this as the market was looking for reasons why the FED should start cutting interest rates.? But the market is a fickle place and all of a sudden bad news is back to being bad news, and this makes today’s crucial jobs report a significant risk event.?
These are the mid rates at 6:50 today:
Brent Crude = $79.93 per barrel
- Things were going well for the Rand yesterday as we opened at R18.20 to the Dollar and spent the morning heading towards the day’s best level of R18.12.? But just as thoughts of a run to R18.00 started brewing we did an about-turn and fell back to R18.31.
- As usual there are a number of moving parts driving currency price action and unfortunately one of them is safe haven flows into the Dollar thanks to escalating geopolitical tensions in the Middle East.? Wednesday saw the killing of a senior Hezbollah commander in Lebanon which was followed hours later by the assassination of a top Hamas official in Iran, events that have reportedly resulted in the Iranian supreme leader, Ali Khamenei, ordering retaliatory strikes on Israel.? Whether this turns out to be a bit of sabre rattling, as it did in April’s flair-up, or whether deeper conflict lies ahead remains to be seen, but for now the headlines are spooking the market with the Dollar a clear beneficiary.?
- A weaker Pound and a weaker Euro also contributed to a rise in the Dollar Index yesterday as central bank activity weighed on these currencies.? In the UK the Bank of England cut interest rates for the first time in this cycle while at the same time European Central Bank member, Yannis Stournaras, warned that Eurozone inflation could fall below their 2% target due to weak economic activity in the bloc. ?With both currencies falling onto the backfoot that would have contributed to the Dollar Index moving higher.
- The Dollar found support from abroad but most of its strength came from developments in the US, developments that until very recently could well have resulted in Dollar weakness.? US exceptionalism is a term that’s done the rounds for months and months with the relative strength of the US economy making it difficult for the FED to justify cutting interest rates. ?Any rare cracks in the US economy were cheered by the market as they increased the prospects of lower rates, and as a result the Dollar dipped on those events, but the landscape seems to have shifted recently with the “cracks” becoming more and more commonplace which the market sees as a worrying indicator about the health of the US economy.? Yesterday those cracks widened.
- More than a few analysts felt that there is sufficient cooling in the US economy to justify a rate cut by the FED at their policy meeting two days ago, but they didn’t cut.? Then came yesterday’s US data which delivered a double blow, first with the manufacturing PMI dropping to 46.8 which is an eight month low, and not good news for a sector that makes up 10% of US GDP, and then we got weekly jobless claims which came in at 249?000 which is significantly higher than the 235?000 forecast and is an eleven month high.? Nervous jitters about chances of a looming US recession did the rounds which ironically supports the Dollar as a safe haven while also driving investors out of equities and into bonds with the 10-year Treasury dropping below 4% for the first time in six months.?
- At 2:30pm today we get the monthly US payrolls report and while the number of jobs created in July is important, whether the US unemployment rate moves higher is now even more so.? Forecasts are for unemployment to remain steady at 4.1% but the following from Reuters highlights how worsening labour dynamics could be seen as a misstep by the FED: ?"Thursday’s selloff isn't about earnings. It's about whether the FED sees what the data is saying," said Quincy Krosby, chief global strategist for LPL Financial in Charlotte, North Carolina. "If Friday’s payroll report sees the unemployment rate rising despite an increase in the participation rate, the FED is going to have a lot of explaining to do."
- No local market data today but yesterday our manufacturing PMI and new vehicle sales both delivered big beats to the upside.? Unfortunately this great news was not able to prevent the Rand from falling but it is encouraging to see local data on the up.?
- Possible USD mid rate trading ranges in the Rand today are R18.10 and R18.40
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