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Currently in the currency and economic markets, there are quite a lot of variables to dissect. The current role players in the market world are still the old foes the inflation number and the interest rates, but the question has changed. The question being asked now is whether the Central Banks are reaching a point where interest rates are at their peak, given the easing of inflation over the last couple of months.
We have been caught in this conundrum of the rest of the world starting to show signs of economic slowdown while we had the US economy chugging along at unprecedented levels compared to the rest of the world. However, lately we have seen that the US economy data is starting to underwhelm and that has caused the US dollar to slide against most currencies. The US dollar traded above 1.1200 against the euro at one stage.
EUR/USD Chart |
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The fact that the US dollar was on the slide against most countries and some of the own goals that South Africa scored in the past couple of months have moved to the back of our minds the rand has staged a remarkable recovery, with the local unit trading at more than R2.00 stronger since the start of May. We have also seen a return of flows to our bond market that was void of inflows for more than a month previously.
The rand has stayed the course even after the MPC of the SARB kept rates unchanged last week after raising the interest rates eleven times in a row. This latest choice by the MPC was taken against the backdrop of softening inflation and the fact that the South African economy is struggling and further hikes could place massive strain on the South African consumer. Further, the rand’s help came in the form of China announcing that it will look to some policy easing to help its slowing economy. Some of the contagion tailwinds will be caught by the rand which could help the local unit.
This week we have seen PMI data from Germany that showed that the German PMI printed its third weakest number in history. This shows the fact that the Eurozone powerhouse is under pressure and that the European economy will most likely go into recession sooner rather than later. We also saw the US PMI numbers coming in weaker than expected, which was mostly contributed by a sharper-than-expected decline in the services industry. This only adds to the recent phenomenon of weaker-than-expected US data.
The main event of the week is the US interest rate decision on Wednesday evening, with the market expecting a 25 basis point increase. While the raise is priced into the market the real nuts and bolts of the decision would be the comments by Fed Chair Powell after the hike. The two possible outcomes that are likely are that the comments by the Fed could continue on its hawkish path or there could be a change in sentiment and the Fed could turn dovish. Any dovish comments could be dollar negative in the short term and could benefit other currencies. We also have the ECB and BoJ interest rate decision out this week. We expect the ECB to raise rates by 25 basis points while the BoJ is expected to hold rates unchanged.
USD/ZAR Chart |
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This could be a week where we see the rand push lower toward the R17.60 level, however, the rand has been on the front foot for quite a while now and we do expect that the recent rally has to run out of steam soon as gains become harder to come by. |