Weekly Currency Brief – 28th Mar – 4th Apr 2017

Who?
It must be demoralising, even hurtful, to be appointed as finance minister only to see your currency smashed on the announcement, and to have your country’s credit rating downgraded to “junk” just a day or two later. Yet that has been the fate of Malusi Gigaba, Jacob Zuma’s pick to replace Pravin Gordhan as South Africa’s finance minister last week. It isn’t that investors and ratings agencies dislike Mr Gigaba. Before his appointment they had probably never even heard of him. But there’s the rub. His predecessor was widely respected and trusted. From the financial markets’ point of view the only motivation for replacing Mr Gordhan was to put a Zuma loyalist in charge of the nation’s coffers.

The episode has put a stop to the upward progress of the rand, which took it 56% higher against sterling over the course of 15 months. In the last seven days the rand was the out-and-out loser, falling by -7.5%.

What?
If asked what are the biggest threats to sterling, most investors would put Brexit somewhere near the top of the list. Witness the way they sold the pound in the aftermath of the referendum. So when the prime minister at last sent her Dear Don letter to the European Council it would not have been unreasonable for them to have thought “ooh, err, it’s actually happening” and to sell it some more. But no. During the two days following the activation of Article 50 the pound was top dog among the major currencies.

The thing was that investors had already sold sterling ahead of the Article 50 trigger being pulled. They’d sold pounds they didn’t own in anticipation that they would be able to buy them back more cheaply at a later date, making a profit. Ms May’s letter, coming conveniently at the end of the quarter, provided the excuse to realise some of that profit by closing out short positions. Hence the pound’s counter-intuitive rally. It lost a net one and a quarter US cents on the week but picked up one and a quarter euro cent, contributing to an average gain of 0.9%.

How many?
Coming up on Friday is the US employment report, which includes the monthly change in the number of people on non-farm payrolls. In recent years that nonfarm payrolls figure has been the world’s most eagerly-awaited economic statistic because it has a direct impact on the thinking of the folk who set US interest rates. The rule of thumb is that rising job numbers mean an expanding economy and higher interest rates.

Friday’s figure will be used by investors as a sort of diving rod to work out whether there will be one, two or three more rate increases by the Federal Reserve this year. As far as the strength of the dollar is concerned, the more the merrier. There is no way, of course, to make such a divination from one figure but that will not stop the dollar rising or falling if the number comes in much larger or smaller than the forecast 180,000.