Some curveballs have been thrown in the last couple of weeks, as the US economic data continues to chug along rapidly, even with all the interest rate hikes the US Fed has done thus far. In the last two weeks, US retail sales came in much higher than expected, US non-farm payrolls beat expectations, and inflation is slowly going down.

In a scenario where the labour market is still not feeling any pressure and retail continues unabated, one can make the case that interest rate hikes have largely passed through the economic system without causing too much damage. However, we know that non-farm payroll numbers can be a lagging figure, as well as the fact that student debt was frozen by the US last year and most likely extended into the middle of this year. This has freed up some funds for US citizens and most likely helped the US retail number. When one puts these two cases forward, there could be a shift in US economic data on the horizon as the anomalies in the detail wash through the system.

Market pricing in more US rate hikes

The data, however, has painted a rosy picture of the US economy as being resolute in the face of high inflation and higher interest rates, contrary to what has been witnessed all over the globe. This has caused the market to believe that the Fed will continue to hike longer than expected and caused the market to run towards the US dollar at the expense of EM currencies. We have seen the US dollar strengthen form above the 1.1000 level against the euro to be trading at 1.0660. The swift move in the US dollar has impacted the emerging markets, and we have seen the EM market under pressure.

This week the international news will be dominated by the US Fed minutes being released on Wednesday. This will give us an insight of what the Fed is thinking on interest rates given the backdrop of stronger economic numbers from the US. The safe bet in the short term is that the US dollar could remain on the front foot, but for how much longer?

As we stated above, the US dollar has put some EM currencies under pressure. The rand has been one of the worst performing currencies this year already, and with further US dollar strength the effect has been far more drastic to see. The weakening in the rand has boiled down to several factors, with local energy issues being the main concern along with the possible grey listing of South Africa.

Rand sliding since the start of the year

Before the FOMC releases its minutes on Wednesday, we have the South African budget, and the market will pay special interest on how the Minister of Finance will balance the books. Particular interest will be paid on how the energy crisis will be handled. A lot of questions will need to be answered on Wednesday, and we have two major events in terms of Rand risks. It will be no surprise if we have a very volatile Rand this week, with two very different outcomes for the currency likely to happen. A good budget will see the rand regain some confidence, and we could see the rand trade below R18.00 again, but any negative news from the budget and the FOMC, we could test the R18.5000 high and possibly higher.