The saying goes, things swing in roundabouts, and currently, in the markets, things are swinging very quickly, with the difference between two weeks being as vast as one can imagine. In the previous weeks, we had a run into safe havens, with the banking sector fearing the worse. Silicon Valley Bank in the US declared bankruptcy and Credit Suisse in the Eurozone was bought and bailed out. This caused the US dollar and Gold to rally quite hard and left EM currencies battling to stay afloat.

US Recession probability at 60%

This week, the US treasury reversed its sell-off, the US dollar lost some steam, and Gold slid back to $1950. With the banking sector appearing to have survived the acute emergency it faced in the last couple of weeks, some confidence has returned to the market, and the threat of a global financial implosion seems to have subsided. It appears that the warning shots of the past few weeks have been alleviated.

On the data front, the Fed hiked 25 basis points last week, as expected. Much was made of the announcement, and what could be gleaned from the announcement from the Fed is that the financial system is sound and the Fed will continue to be data-dependent. One can imagine that the expectation for future Fed action was all over the place, with some market players stating that the Fed should cut at its next meeting, but that call has softened over the past few days, with the market expecting the Fed not to cut in 2023.

Markets unsure about the Fed

Some of the big data events this week are the final GDP number for the 4th quarter out on Thursday, and the PCE number out on Friday. The PCE number will garner a lot of attention as this is the Fed’s preferred measure of inflation and will again put the market in a spin should the number print above expectations. Scattered between these numbers will be a smattering of Fed speakers, which the market will pay attention to.

Inflation sticky on the way down

On the South African front, the rand traded between R18.10 and R18.60 for the past few weeks, being quite resilient to the stronger US dollar, but not enjoying the weaker US dollar as much as the other EM currencies. This only reiterates our point that the rand has a significant risk premium built into it due to the challenges faced in South Africa.

This week we have the MPC of the SARB on the South African interest rate. The expectation is for 25 basis points, much in line with what the Fed is doing. With much of the risks in the market seemingly abating, we can expect some bias for the rand to strengthen.