04 May 2018

What we know

 

The greenback has continued to flex its muscles across major currencies this week, evidenced by the US Dollar Index sitting at its highest level since December 2017. Data out of the US included inflation numbers coming in slightly below the 2% Fed target, as well as unemployment continuing to remain at its lowest level in years, just above 4%.

The US Federal Open Market Committee (FOMC) unanimously decided to keep the benchmark interest rate unchanged at 1.50% to 1.75%, which was expected by most. However, the jury is still out on whether their anticipation of inflation remaining around the 2% mark over the medium term would lead to four interest rate hikes in 2018, as opposed to the expected three. This would not bode well for the Rand and other emerging market currencies.

Positive news on the South African front includes a trade surplus of R9.47bn in March, which is a huge improvement on the accumulated year to date deficit of R18.6bn, compared to a R4.22bn surplus over the same period the year before.

 

What others say

 

30 April 2018

RMB Global Markets Research and Sales – Korean peace, Fed Next

“This week will be a big test for EM, with the Fed as well as inflation figures out from the US… Seasonally, May is a good month for the dollar, but many have been left to wonder whether the strong rally in April has pre-empted some of that move. Again, these events will have a strong feedback mechanism into our bonds. As such, while the price action in yields has been constructive, we remain very much at the whim of these macro events.”

01 May 2018

Bloomberg – Dollar Bulls Finally Get Lifeboat as 10-Year Yield Grazes 3%

“There is potential for a bit of a short squeeze and a pain trade in dollars and we want to protect ourselves from that,” Riley said in an interview. “It makes more sense in some of our multi-asset credit portfolios to hedge some of that exposure we have via EM.”

02 May 2018

CNBC – In a treacherous time, these three events could reignite stocks

The Friday jobs report will hit right at or near expectations of 195,000 jobs created. If it is too strong, say, 250,000 or above, the bears will say it reinforces the notion that the Fed will hike rates aggressively. If it is too low, say, 95,000, the bears will seize on the slower growth story.

Nedbank: Monthly Insights – Executive Summary

“…There are some downside risks to growth in our opinion…Long-term seasonality trends suggest that the rand will likely remain under pressure in May, and then recover in the following months. We remain of the opinion that the rand could weaken marginally into year-end, but if the SARB remains hawkish for longer then it would be supportive of real rates and would keep the rand relatively stable.”

03 May 2018

Investec – Morning Reports

“…investors might question whether the USD bullish undertone should remain as intact as it was ahead of the [Fed] decision. Prior to the decision there were concerns that the Fed might turn even more hawkish. They did not and so it is possible that the USD now takes a breather.”

Business Live – Rand’s retreat shows Ramaphoria is losing its glow

“Capital Economics analysts say it does not look as though there is a need for large currency adjustments in emerging markets, with the exception of Argentina and Russia”…”In contrast to the Taper Tantrum of 2013, emerging market currencies are not, on the whole, overvalued”… ”TreasuryOne currency dealer Andre Botha said that the market believed the rand was overextended at present levels…But trade could remain jittery,” said Botha.

What we think

 

While we anticipate today’s US non-farm payroll release will ultimately dictate direction on the ZAR.USD, we do feel a short-term pullback towards the 12.20 – 12.40 level may be on the cards, given the significant slowdown in momentum following a testing of the 12.70 resistance levels, as well as some anticipated likely “profit-taking” by USD bulls going into the weekend.

Whether the above scenario plays out remains at the discretion of the market, however, for now, we anticipate a ZAR.USD range of 12.20 – 12.80.

 

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Have a great weekend!