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Money Market FundsGlobal markets entered the week under renewed pressure as the conflict in the Middle East broadened beyond the direct US-Iran confrontation. Attacks linked to the Houthis in Yemen have increased concern around Saudi energy infrastructure and Red Sea trade routes, contributing to further disruption in oil flows. Oil prices have consequently moved back above $100 a barrel and closer to $110, placing renewed pressure on inflation expectations worldwide.
TreasuryONE’s latest market update highlighted how higher energy costs are feeding through the entire economy, from fuel and logistics to the eventual price of goods paid by consumers. This has shifted attention firmly back to monetary policy, with markets pricing a roughly 75% to 80% probability of a US Federal Reserve rate hike at its upcoming meeting. The more important signal may come from the Fed’s guidance afterwards, as a hawkish outlook could drive expectations of further hikes and place additional upward pressure on the dollar and longer-term yields.
The US is not alone in confronting renewed inflation pressure. With the European Central Bank having already raised rates and the Bank of Japan also expected to tighten policy, attention is turning to the South African Reserve Bank’s meeting next week. TreasuryONE expects the SARB to remain focused on protecting the progress made in bringing inflation toward its lower target, making an interest rate increase increasingly likely if inflation risks persist.
For the rand, the combination of higher oil prices, a stronger dollar and changing global interest-rate dynamics is creating mounting pressure. TreasuryONE also flagged the risk posed by higher Japanese rates, which could reduce the attractiveness of the carry trade and encourage capital to move back toward Japan. That would create another headwind for emerging-market currencies, including the rand. While a sharp move toward R17 is not expected immediately, TreasuryONE sees scope for the currency to weaken toward the R16.50 area in the weeks ahead.