There have been significant movements in the markets at the beginning of 2023. As anticipated, the majority of market movements have been caused by Central Banks and their fight against inflation using interest rates as their primary tool. Over the past few weeks, we have seen that inflation is starting to subside and the Fed has stated that it will continue to raise interest rates, albeit at a slower rate.

US Dollar weakened significantly

The market understood this to be that the Fed may begin rate cuts at the end of the year. US inflation has peaked at above 8% and the last print was 6.6% – we expect inflation to slow down more as the base effects of last year will start to affect the number.

What has this seemingly putting the brakes on interest rates in the US meant for the market? The US dollar is a lot weaker than it was 6 months ago – it is above the 1.0800 level after trading well below parity at one stage during last year. The weakness in the US dollar has caused a bit of “risk-on” in the market and riskier assets have gotten off to a strong start in 2023, as a result of the dollar’s weakness.

Risk of recession rising

In saying that, the Fed is taking its foot off the accelerator, and we still believe that there is a significant chance of a recession hitting the market in 2023. With interest rates expected to rise in the first half of 2023, anaemic economic growth could be stifled more, and recessions could start to pop up around the world. Should a recession happen, we could expect the US dollar to stage a recovery and EM currencies to come under renewed pressure.

Speaking of EM currencies, we have seen the rand starting 2023 on quite the rollercoaster, trading wildly between R16.60 and R 17.40, as local factors are starting to weigh on the rand. We have seen the rand run on headlines of suggestions that the SARB should expand its mandate. We have also seen that local issues like Eskom are also placing a handbrake on any significant Rand appreciation.

It is quite easy to see that the rand is lagging behind its EM peers in appreciation, which only cements the notion that there is quite a significant risk premium built into the rand, as should the premium be taken out, the rand should be trading around the R16.00 level. The current concern is that local headlines are beginning to affect the rand, which in the past would have blown over, but the spotlight is now on South Africa. This means that both local news and the US dollar could affect the rand.

Rand the weakest EM currency

Looking at this week, we have very little in the way of top-tier data, which could intensify the scrutiny on the rand, and we could see the rand trading a little choppy. The rand started off the week at around R16.70 but has weakened above R17.00 and looking a little vulnerable for the rest of the week.