The start of 2023 was akin to a rollercoaster as we saw local and international events start to move the rand. And while we had quite a volatile start, things seem to have petered out a little in the last week or so with the market starting to trade within well-defined fields. The rand seems happy to trade in the R16.90 – R17.30 level at the moment. It feels that the local issues we had at the start of the month have dissipated a little and we look to new momentum going forward.

On the US dollar side, we have seen economic data looking better than expected, which in turn has caused the market to leave the safety of the US dollar and venture out into riskier assets like the rand and other emerging market currencies.

Looking at the graph below one can see the dollar’s decline so far in 2023:

We do however hasten to add that there is still a sword hanging over the world economy of a looming recession and every so often we get that reality check in the market and see some knee-jerk reactions when recession fears heighten.

Another factor that is slowly starting to emerge again is the reopening of China and what that could do for prices in the market. We have seen that Brent Crude and other commodities have been trading at higher prices since the start of the year. Brent Crude is expected to trade above $90 per barrel as demand for oil from China increases and further restrictions are placed on Russian oil, as Russia is still engaged in its war with Ukraine. The impact of higher oil prices cannot be denied, and we could see inflation being sticky on the way down, which could mean that we will see inflation higher than expected for longer.

In a week where few events or data of importance will be released, we expect the market to drift sideways with the US dollar staying between the 1.0850-1.0950 range. The Fed has entered its blackout period before the next Fed meeting, where no Fed official is allowed to make a statement regarding the upcoming Fed meeting. On the data side, the advanced number for the 4th Quarter GDP is out of the US on Thursday. Should the number be better than expected, which has been the case with US data of late, a weaker dollar could be on the cards.

On the rand front, we have the MPC decision tomorrow, with the smart money being on a 50 basis point hike, however with the US indicating that it will hike only 25 basis points going forward, it will not be such a surprise should the MPC of South Africa decide to hike by only 25 basis points. The MPC is dancing on a tightrope on curbing inflation with interest rate hikes, while not cutting off the anaemic growth in South Africa.

Looking at the below graph, we expect that we are close to the top of the hiking cycle and the rate cuts could start as soon as the back end of 2023.