USD: Greenback continues to outperform all other currencies amid various global inflationary pressures; EUR: Germany officially entering into a recession as of 1 June 2023; ZAR: Rand nosedives in value resultant of Lady R scandal, and MPC raises repo rate; GBP: Sterling local inflation dropping with signs of real hope for economic boom in the near mid-term; JPY: Inflation slowing down, but fresh food and fuel costs ambiguously remain volatile; AUS: Local manufaturing numbers down for third consecutive month;
USD: USD DOLLAR RECORDS STRIKING FOREX MAY PERFORMANCE
U.S. GDP experienced a growth of 1.3% on an annualized basis during the first quarter of 2023. This figure surpasses the initial estimate of 1.1%, reflecting a positive upward revision.
The expansion was primarily propelled by an increase in private inventory investment, robust consumer spending, and strong government expenditures. Additionally, the country witnessed the addition of 253,000 jobs in April, further fueling the momentum of economic growth.
Economists from the Federal Reserve, however, have predicted a mild recession later this year, emphasizing that an economic downturn is necessary to moderate inflation and bring it in line with the central bank's target of 2%.
In response to this news, the value of the US dollar (USD) surged to its highest level of the session against major currencies such as EURUSD, USDCNH, USDJPY, and USDINR. This notable performance positions the USD to achieve its strongest two-month performance in recent times.
EUR: GERMANY ENTERS INTO RECESSION
Following an arduous struggle to secure energy supply, resulting in a rapid decline in household expenditures (-1.2% quarter-on-quarter), the German economy has officially plunged into recessionary territory, marked by two consecutive quarters of negative growth.
During the first quarter of 2023, the country's economic output witnessed a decline of 0.3%, following a contraction of 0.5% in the fourth quarter of 2022. The German Federal Statistical Office attributes this downturn primarily to the "shock in energy prices."
However, the recent stabilization of natural gas prices at levels comparable to those seen in late 2021 offers a glimmer of hope, hinting at a potential alleviation of inflationary pressures burdening consumers.
It is anticipated that a swift rebound in consumer spending will provide the necessary support to revive the economy and curtail the duration of this recession.
ZAR: RAND NOSEDIVES AGAINST USD & EUR, MPC RAISES RATES YET AGAIN
The MPC has decided to increase the repurchase rate by 50 basis points to 8.25% per year, with effect from the 26th of May 2023.
Although we believe there are valid reasons for the MPC to take a pause, considering the cumulative increase of 425 basis points thus far, there remains a high likelihood of implementing an additional 25-50 basis points hike.
If this materializes, the repo rate will reach 8.25%, reaching its highest level since early 2009 when the interest rate stood at 9.5%.The South African rand has experienced a decline in value over the past year, and this depreciation has accelerated in recent weeks.
Based on current assessments, the Lady R scandal's effect on international investors of the South African economy will continue to depreciate the Rand.
The increase in South Africa's headline inflation rate has primarily been influenced by inflation in fuel, electricity, and food prices. Compared to the previous MPC meeting, the inflation rate for fuel and electricity has slightly decreased, whereas food price inflation has risen.
GBP: STERLING INFLATION DROPPING WITH SIGNS OF REAL HOPE
The inflation rate in the United Kingdom recorded a value of 8.7% year-on-year in April. This was attributed to the gradual normalization of energy prices and a reduction in the impact of Russia's invasion of Ukraine. Although this figure is lower than the previous month's rate of 10.1%, it still exceeds the estimated rate of 8.2%.
On 22 June, the Bank of England (BoE) is scheduled to announce its decision regarding interest rates. Despite the economy defying expectations of a recession in recent months, investors are currently pricing the likelihood of a quarter-percentage-point increase in borrowing costs for the upcoming month at 100%.
Jeremy Hunt, the British Finance Minister, stated, "We still have a considerable distance to cover." The BoE cannot overlook the smaller-than-anticipated decline in the Consumer Price Index (CPI) for an extended period.
JPY: INFLATION SLOWING DOWN, BUT FRESH FOOD AND FUEL COSTS STILL TROUBLESOME
Consumer inflation in the capital city of Japan experienced a deceleration in May, but a significant indicator that excludes fuel costs reached its highest level in forty years. This crucial data, often regarded as a leading signal for the overall national economy, indicates that companies are persisting in passing on the burden of escalating expenses to households.
The Tokyo core Consumer Price Index (CPI) rose by 3.2% in May compared to the same period in the previous year, approximately aligning with the median forecast of a 3.3% increase in the market. However, the index, which excludes the costs of fresh food and fuel—both of which exhibit volatility—surged by 3.9% in May, marking the most rapid escalation since 1982.
Considering these developments, investors are speculating that the BoJ, under the guidance of its new governor Kazuo Ueda, may soon phase out its ultra-loose monetary policy. Additionally, a survey indicates that the central bank is likely to commence the unwinding of its yield curve control (YCC) by late July, thereby raising the current cap of 0.5% on the yield of the 10-year government bond.
AUS: MANUFACTURING EXPERIENCING A THIRD-MONTH DOWNWARD TREND IN ACTIVITY
Australia's flash manufacturing purchasing managers' index (PMI) has maintained stability, remaining at the 48.0 level in May. This signifies a continued decline in business conditions within the manufacturing sector for the third consecutive month.
The situation aligns with the global slowdown in manufacturing, reduced demand for consumer goods, and a lack of growth in the construction industry in the country.
On a positive note, Australia's private sector has witnessed sustained growth in the preceding month, surpassing the 50.0 threshold for the second month in a row. This upturn can largely be attributed to the upward trajectory in services activity.
Despite the disparity in performance between the manufacturing and services sectors, there has been an overall improvement in business confidence.
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