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Over the past few weeks, the same theme has emerged in the markets as it has for most of 2022: the US dollar is the only yardstick by which the market plays. With the US economy not sputtering as predicted, at least for now, the market is jockeying for position, as the word now is that the US could be in for a soft landing. On the back of better-than-expected US economic data, the US dollar has retreated from the 1.1000 level against the euro to below 1.0700. Given the market-moving ability of the US dollar, it is no surprise that the EM currencies are under pressure. US dollar on the rise |
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Speaking of emerging markets, the rand is looking the most vulnerable of all the EM currencies, and that is normally the case in bouts of risk-aversion that we have seen in the past week. However, much of the rand’s troubles have been self-inflicted due to the front page news of the energy crisis, the state of disaster that has been brought about and the fact that the rating agencies are again looking at South Africa, with possible downgrades in the pipeline as their stance on South Africa has taken a turn for the worse. While South Africa has been the master of much of the weakness in the rand, there are some other metrics that have turned up just to reinforce the move into the US dollar of late: we have US Treasury yields that have shot up in the past couple of weeks, and the Gold price lost around $100 in the past few weeks as people move back into the US dollar. We do still have inverted yield curves that normally indicate a looming recession, but it is funny how the rhetoric has changed regarding the US inverted yield curves. 2y/10y Treasury Yields most inverted in 20 years |
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The new narrative is that this time the inverted yield curves in the US may not be pricing in a recession but a sharp decline in inflation. This would mean that the Fed could stop raising interest rates and that a rate cut at the end of the year could be imminent. Is inflation losing steam? |
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While last week was mainly dominated by the aftermath of the previous week and local events related to the SONA, this week we have returned to more data-driven news. From the Eurozone, the 2nd estimates for GDP growth are out, which could impact the market as we could see the effect of the tighter monetary policy coming through. The real star of the week’s data releases is the US CPI number which came out higher than expected at 6.4% year-on-year. This will fit into the FED’s narrative that peak rates will be above 5% and will stay there for longer There are also several Fed speakers scheduled during the week that could keep the market on its toes. As for South Africa, we expect most of the local news to be priced in, and we will follow the US dollar and other EM’s. On the data front, the SA CPI will be released on Wednesday. The key insights will be whether inflation is cooling in South Africa and whether we are approaching the inflation target band again. |