Christmas is coming…

And with it the silly season, which has already hit the emerging markets in spectacular fashion. In South Africa, President Jacob Zuma made the Naughty List over the handling of his Cabinet. Today (14 December) Pravin Gordhan became the third person in less than a week to be South African Finance Minister. As our colleagues in South Africa have pointed out, this must be some kind of (unenviable) world record.

Panicked investors fled the rand last week, but this has now given way to a rally. The rand has picked up 5% against the US dollar, because Mr Gordhan performed well as finance minister from 2009 to 2014.

However, after taking such a massive battering we shouldn’t expect the rand to bounce back into shape any time soon. With Mr Zuma’s reputation in the balance and South Africa’s credit rating hovering only one notch above dreaded “junk” status, it’s likely there’ll be more volatility for Africa’s largest industrial economy – and sooner rather than later.

Hopes high for US rate rises after ECB disappointment

Turning from the “Oh no, no!” to a more festive “Ho ho ho!”, the markets are abuzz with expectation that the US Federal Reserve will unwrap the first US rate rises in years when it meets on Wednesday. There’ll be many sad faces if the lift-off fizzes out – especially after the European Central Bank promised bags of goodies and offered lumps of coal instead.

Speculation about the timing of an increase in rates has been driving the dollar higher in recent months, but the decline in oil prices and China’s yuan seem to have dented hopes for a quick return to more normal lending rates. Retail sales rose 0.6% in November, and the producer price index rose 0.3% last month, although it was down 1.1% on a year-over-year basis.

The dollar dropped 1% against the euro to trade close to its lowest since early November. The greenback also fell to a five-week low against the safe-haven yen, ending the week down 1.8%. The two-day FOMC meeting starts on Tuesday, with a statement due out Wednesday. Markets are currently pricing in a four in five chance of the Fed raising rates this week.  

Sterling recovers a bit of its losses

Sterling rallied last week after sinking close to its lowest in eight months against the US dollar. The pound gained 1% as it bounced ahead of the Bank of England (BoE) policy meeting and largely held on to these gains going into the week starting 14 December.

The BoE left rates on hold, as expected, and signalled it could be many months before it is ready to raise its benchmark lending rate. The dovish tone weighed a bit on Sterling, which is trading at two-month lows against the euro. Meanwhile, the pound saw impressive gains on the Australian dollar, rising 3% at one stage before paring gains to start the week 2% higher.

In the minutes from its meeting the BoE warned that inflation is “subdued” and that pay growth had flattened off. This week we get data on both, with UK CPI inflation figures out on Tuesday, followed by unemployment and earnings data on Wednesday. Analysts predict a slight uptick in inflation for November, but with oil prices hitting seven-year lows there a few signs of any meaningful rise in prices for some time.

Rising sun of Japanese yen eclipses euro

The euro held on to most of its gains following the European Central Bank’s surprise announcement on 3 December. It rose by 1% against the US dollar, and added one penny against the pound. However, the euro was down against the Japanese yen, which gained on growing concerns about riskier assets.

ECB President Mario Draghi spoke at an event in Italy today (14 December), where he acknowledged the dismay caused earlier in the month by the decision not to pump more money into the Eurozone. He told the crowd that if the ECB had to intensify the use of its instruments to ensure that it achieves its price stability mandate, it would.

Elsewhere on the events calendar for the euro this week:

• Tuesday: The ZEW Institute reports on German economic sentiment
• Wednesday: Release of manufacturing and service sector data for the Eurozone
• Thursday: The Ifo’s German business climate index is out

China still cracked

China’s yuan dropped to its lowest levels in four-and-half years last Friday, as worries about slowing growth in the world’s second-largest economy and the prospect of higher US interest rates combined to pressure the currency lower.

The Chinese central bank eased the path lower on Monday, setting the official midpoint for the yuan/dollar pair at its weakest since July 2011.

Have a great week!