Despite the lack of data and events from last week, it was still an important week from a market perspective, and quite a few things could be gleaned from it. The first is that the US dollar wants to weaken, and this was broadly the case last week with not a lot of momentum-giving indicators in the market. This also leads nicely into the base case that the rand should trade stronger on market reaction alone, however, the current situation in South Africa has built in quite a large risk premium and has stopped the rand from strengthening materially.

One-way traffic for the rand

The rand currently finds itself stuck between the R18.00 – R18.50 range. One only needs to look at the performance of other EM currencies to know that the rand is trading substantially weaker against its EM peers. It won the dubious honour of being the worst-performing currency in the world for February. This week poses some directional risk for the US dollar, and therefore the rand, and the market look a lot different at the end of the week than what it looks now.

We have Fed Chair Powell giving his testimony to Congress starting today. The market will listen to his testimony and go over every statement with a fine tooth comb and see if they can suss out the thinking of the Fed. If there is any inclination that the testimony could be hawkish, we could see the US dollar on the front foot, which would invariably be bad for EM’s. The testimony poses event risk and needs to be watched closely.

US Non-Farm number the constant outperformer

On Friday, we have the US non-farm payroll numbers, and we had a massive surprise in February where the number far exceeded expectations. A lot of metrics have given indication that a severe shock is on its way, like the inverted yield curves in the US being the most inverted in 40 years. However, some of the data does not support that view, and we have seen the non-farm numbers and the retail sales buck the recession trend. We have seen that non-farm numbers have been above expectations for the past 10 months, should that continue we expect another bout of US dollar strength or will number 11 be the one where everything changes? The consensus number is 200,000 jobs created in February.

The rand lost some of its momentum of last week, and what is also worrying is that the US dollar has lost some ground at the start of the week. The rand made a swift about-turn after it traded up around the R18.50 level, and should data and events go against the EM’s we can expect the rand to test that level again. We still hold the view that the rand could be trading stronger in the medium term, but it could be a bumpy ride in the short term.