Not a day goes by these days without some sort of economic news or data that markedly shift the sentiment in the markets. Last week was no different – just when we thought things were looking up – a financial crisis had been averted, after all – OPEC members enacted more restrictions on oil supply. This has thrown a spanner in the works as it could lead to higher oil prices and higher inflation.

But first things first: last week, we saw some normality in the markets with the takeover of Credit Suisse by UBS and the banking situation in the US looking brighter. The US dollar lost some ground as risk sentiment turned from very risk-averse to slightly better. The US dollar moved from 1.0710 back to 1.0900 as a major crisis seemed to have been averted. The US interest rate expectations levelled out a little as well, and interest rate cuts in 2023 seem to have been almost exclusively ruled out.

Then came the weekend when it was announced that OPEC and its allies would cut production by 1.15 million barrels per day from May until the end of the year. The oil price jumped by 6% in the wake of the announcement and could be elevated for some time, especially going into the summer months in the northern hemisphere. The major risk of higher oil prices is that it could cause higher inflation should the price remain elevated – this could force the hands of several central banks to hike interest rates further.

Oil spikes on cuts

However, oil is normally a function of supply and demand, and with the impending recession that we believe could happen, a lack of demand will drive prices lower. It is also interesting to note that every time the price comes near the US stated price to refill its strategic stock, oil-producing countries announce production cuts. It is something to keep our eyes on as the OPEC countries try to wrestle the pricing power away from economic decisions.

US growth starting to slow

Looking ahead to this week, we already had worse-than-expected data out of the US, with PMI data out of the US flattering to deceive. We need a few data points to confirm that the US economy is starting to slow, and we can’t call impending slowdown on one number. However, we don’t have to wait long before we get our second meaningful data set, with the US non-farm payroll number coming out on Friday. Should the number disappoint, we could see the US dollar under pressure, which will bode well for the rand.

Speaking of our local unit, the MPC of the SARB surprised markets with a 50-basis point hike. The market was expecting a 25 basis point hike, and the bigger-than-expected hike helped the rand in the short term, but we are still seeing the rand being held up by the risk premium in the country. The hike has some analysts saying that the MPC is done hiking, but that could change depending on what happens abroad. Whether the South African economy can stomach further hikes is also a cause for concern.

After the announcement, the rand broke below R18.00 for the first time in a month, and should we see a weaker US dollar in the week, the rand could push lower and test R17.60. With this being a short week, we expect moves to be sharp as the market positions itself for the long weekend.