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The South African Reserve Bank (SARB) kept rates stable, with Governor Lesetja Kganyago warning of a “worsening growth outlook” for the country. While rates were held steady, Kganyago emphasised that South Africa remains in a rate-hiking cycle. The market expectation is for another 50 basis points increase for the remainder of the year.
The effect on the rand was muted as the market tried to balance between the potential risks and a rate-hiking cycle in an environment where a third of the world’s bonds trade in negative territory. Higher interest rates in SA make depositing cash in rand more attractive and an influx of deposits in the local currency will prop up the rand’s value.
US
The greenback scored a touchdown after the Federal Reserve’s April meeting minutes and comments by voting members at press conferences suggested that interest rates may be hiked at the Fed’s June meeting. The Fed lifted rates for the first time in nearly a decade in December 2015.
Recent data made policymakers more confident that inflation is rising towards the Fed’s 2% target. Most of the Fed governors expressed fewer concerns about global growth. The steady improvement in the US labour market and inflation data also inspired confidence.
Some policymakers expressed concerns that the financial markets could be affected by a possible Brexit and a slowdown in China.
Europe
The pound got quite a boost after a poll suggested that the likelihood of Britain leaving the EU had diminished somewhat. Uncertainty over the likelihood of a Brexit has created a lot of market volatility, as a ‘Leave’ vote is likely to have serious implications for the financial markets.
The German economy remains on a solid growth path due to strong domestic demand but momentum is expected to wane. The German finance ministry said on Friday that the latest economic indicators show that the “upswing is likely to continue over the course of the year, albeit at a slower pace”.
Commodities
Oil prices rallied due to a number of supply issues, including turmoil in Nigeria, shale producer bankruptcies in the US, wildfires in Canada and the economic crisis in Venezuela. Despite this, brimming inventories put a cap on further price increases.
Gold took a bit of a break after a hard rally in the first quarter. Speculators have really made it hard to find any clear technical indicators as to where it could go. Some billionaire investors, like George Soros, are buying into gold as a hedge against potential market turmoil stemming from China. However, John Paulson, one of the world’s most influential gold investors, has been cutting the investments held by hedge fund Paulson & Co. in SPDR Gold Trust, the world’s biggest gold exchange-traded fund.
Important economic announcements due this week:
Monday
- Japan Balance of Trade
- EU Consumer Confidence Flash
- US Purchasing Managers’ Index (PMI)
Tuesday
- Germany: Markit Composite PMI; ZEW Indicator of Economic Sentiment
- US New Home Sales
Wednesday
- Bank of Japan Monthly Report
- Germany: GfK Consumer Climate Study; Ifo Business Climate Index
- EU ECOFIN Meetings
- US Crude Oil Inventories
Thursday
- Great Britain Second Estimate of GDP for the first quarter
- US Durable Goods Orders, Unemployment Claims and Pending Home Sales
Friday
- Japan Inflation Rate
- US Preliminary GDP for the first quarter
Giacomo Bonavera is head of foreign exchange trading at Capilis Asset Managers. Click here to visit the firm’s website.
