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Credit Growth Slows, Lends Weakness To South African Rand

Friday, 29 December 2006 17:42:40 GMT  |  Richard Lee, Strategist

·          Credit Growth Slows, Lends Weakness To South African Rand

·          Interest Rate Speculation Boosts Scandinavian Currencies

·          Money Supply Accelerates In Hong Kong

 

South African Rand

 

Year end paring helped the US dollar gain against the South African rand, even as credit growth figures remained lofty following the release of M3 figures in the overnight.  For the month of November credit growth slowed by an annualized 26.8 percent in the month, after rising by 27.5 in the October.  Although pulling back from the record high, the double digit figure is still expected to keep central bankers steadfastly hawkish, continuing on their tightening path in the first half of 2007.  Consumer spending remains strong with notable increases in certain sectors that have already prompted the 2 full percentage point hikes since June of this year.  Growth in mortgages slowed to 30.4 percent in the month, however, leasing financing rose 15.8 percent annually on items such as cars.  Consumer retail spending is also stronger and well supported and will likely add to the broader M3 measure, already accelerating at a 25.3 percent clip, according to the central bank.  As a result, policy makers continue to forecast inflationary pressures well above the 6 percent benchmark target set by the South African Reserve Bank, lending to further strengthening of the underlying rand.  For the record the underlying currency has already moved 10 percent against the dollar and will likely do so as long as the trend continues.  However, comparatively some potential for weakness remains as the deficit grows, making it increasingly necessary to increase interest rates.  The rand is also likely to weaken as a result of an appreciated currency, which makes it difficult to boost competitiveness of South African goods.

 

Nordics – Sweden, Norway, Denmark

 

For the second consecutive session, the Norwegian Krone and Swedish Krona moved higher against a downtrodden dollar, and higher still for the third straight session against the Danish Krone.  Supporting the move during the New York session was speculation that interest rates would continue higher, not new news at all, as credit growth continued to accelerate in Norway.  Boosted by exploding growth in the past quarter, credit growth rose by 14.8 percent in the month of November.  Credit growth in household borrowing accelerated by an alarming 21 percent from 20.4 percent and will like add to undertones of rising inflation.  The notion will keep central bankers on tightening alert, already raising rates seven times from a record low interest rate back in June of last year.  The sentiment seems to be echoed in both Sweden and Denmark with the Riksbank expected to lead the pack in combating inflationary pressures.  All three Scandinavian economies are experiencing healthy rates of growth with labor market capacity reaching the tightest levels in a long time.  Until sentiment shifts, speculation on the matter looks to continue to add to the overall appreciation of the regional currencies.

 

Asian Bloc – Singapore and Hong Kong

 

Devoid of economic data, the Asian markets were subject to dollar strength in the last trading session of the year.  The Singapore dollar stalled just below the1.5350 figure on reversal of the past two session gain.  The Hong Kong dollar comparatively, bolted through the 7.7750 support figure losing to 7.7800 during the overnight session and New York.  The price action fluctuation was in contrast to promising data in the overnight and next week with both economies showing key data in coming days.  First, the inflationary pressures built up during the month of November as money supply figures in the Hong Kong economy surged ahead of previous figures.  Previously rising by 16.5 percent, the annualized M3 supply component accelerated at a 27 percent clip.  Even more surprising was the M1 cash component, as it surged a whopping 64.8 percent against a prior 9.3 percent.  The figure alone contributes to speculation that inflationary pressures are likely to boost restrictive policy by the Hong Kong Monetary Authority.  Expansion in the Asian economy has led consumer spending higher as manufacturing and confidence have grown domestically in recent quarters.  Subsequently, these figures will match up with next week’s Brunswick PMI and retail sales survey in determining the likely direction of any implemented restrictions in the near term.  Singapore dollar will additionally be heavy next week as the advance gross domestic product figure is set for release.  Followed by expansionary manufacturing figures, the report is likely to add to already bullish momentum as the underlying currency tests nine year highs.  Both reports are anticipated to run positive with overall expansion paring back slightly to a 5.1 percent annualized rise.

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