September 07, 2021
MyCURRENCY News | Week 36 2021
What we know
The US jobs report on Friday showed why the prospect of a prolonged commodities rally isn’t the only reason not to bet too heavily against local assets. While from a SA perspective, it’s hard to see the creation of 235,000 jobs as a disappointment, the markets were left underwhelmed when US nonfarm payrolls increased by that number in August, well short of the 733,000 forecasts by economists.
That reinforced the market view that US interest rates will stay unchanged for longer, possibly way into 2023, while reigniting debate about when the Fed will really start reducing its activities in the market. For SA, which has set itself apart with its ability to control inflation, it also means the Reserve Bank has even more room to keep giving the economy the support it desperately needs through official rates that are at the lowest level in about five decades.
Going by market signals alone, the reaction of most asset classes since Friday seems to favour the interpretation that the big jobs disappointment was an aberration and will prove temporary. Yet these market signals themselves are heavily distorted by what remains enormous and ever-increasing direct Federal Reserve intervention in the pricing of a wide range of assets.
The interpretation challenge is especially acute for the Fed given that it is considering gradually reducing those monthly purchases of $120 billion of assets. Rather than clarify the situation, Friday’s jobs report muddles the evidence for a decision under the Fed’s new monetary policy framework, which is backward looking as it is based on outcomes or lagging economic data rather than projections. Indeed, central bankers within what has become an increasingly divided Fed will find competing support from the data for their competing positions.
Having said that, the compositional issues within the FOMC membership suggest that Friday’s employment report may well push back expectations of a taper announcement from September to December. In turn, this will delay the start of the actual taper from this year to 2022, providing financial markets with an even longer path of massive liquidity support. Until Fed Chair Powell knows how much more is coming down the pipe in terms of economic data, he will be deeply reluctant to turn off the taps. The life of a modern central banker is not an easy one. There are no prizes for a misstep.
What others say
Bloomberg – Xi Jinping may be leading China into a trap
This inevitably implies some ceding of power by the rulers. It also potentially implies political change. South Korea and Taiwan both transitioned from authoritarian to democratic political systems as they became richer. The largest high-income economies are almost all democracies. Xi, a believer in the historic mission and preordained victory of the Communist Party, is far from receptive to such a message. The party has embraced markets, but from a position of superiority. Like laws, they are there to be used, when useful; the party remains supreme, above all.
Daily Maverick – Lockdown restrictions likely to slow South Africa’s Q2 GDP growth
Arthur Kamp, chief economist at Sanlam, sees Q2 growth at only 0.5%, citing the hits taken by restaurants and tourist accommodation during the level 4 restrictions and softer mining performance. The latter is particularly contentious, with the Department of Minerals and Energy failing to provide Stats SA with the figures for June for reasons the department has yet to explain.
Financial Times – Wall Street stocks hit highs ahead of US jobs report
Investors have hedged their bets in recent weeks by topping up their holdings in companies viewed as relatively insulated from slowdowns, such as tech and healthcare groups. “When you have fears about growth, tech stocks usually show up as a means of defence,” said Patrick Spencer, vice-chair of equities at RW Baird, particularly after these stay-at-home businesses thrived through last year’s lockdowns.
Business Insider – The CEO of a crypto research firm says bitcoin is going to $100,000 by year-end
“In the bear market, a lot of interesting things have been built, and that basically facilitates a new bull market,” he said. “Yes, I think we’re still in a bull market. I think we can see above $100k by the end of the year.”
What we think
This week is certain to be eventful and one of the many releases could be a catalyst for a change in the Rand’s trajectory, with the second-quarter GDP and current account balance to be released. This will be the first GDP release since its reweighting and rebasing and the revision to 1Q21 GDP will also be released (having been excluded from the reweighting and rebasing release). The current account is expected to remain in surplus and to rise as the trade surplus in 2Q21 comprised three consecutive months of above R50bn trade surpluses.
That the USD has not come under more selling pressure since Friday’s weak labour market data may leave investors wary that its retreat has run its course for now, especially as the Dollar Index has shown tentative signs of a turnaround so far this week. The ZAR potentially stands to lose the most if the USD turns, having gained the most in the EM currency basket over the past two weeks. This morning, the USDZAR is treading water just north of 14.2000.
The other big threat to this benign environment remains China. Even though Chinese equities have stabilised recently and USD/CNY has edged away from 6.50, there is still much focus on the Chinese real estate industry with fears of defaults which could cause creditors to rain on the parade.
We will continue to monitor the Dollar Index drift within the 91.80/92.00 range, as liquidity returns into the markets after the US long-weekend, although the market does look increasingly ripe for a USD-bullish catalyst.
Our range for the week R14.20 – R14.50.
Have a great week!