May 09, 2022
MyCURRENCY News | Week 19 2022
What we know
On Friday, CNBC was able to roll out its “MARKETS IN TURMOIL” package, and honestly, it felt appropriate. The USDZAR, in particular, went into a sudden and mysteriously violent tailspin by Thursday. That’s after dropping 2.8 per cent on Wednesday, touching 15.41 after Federal Reserve chair Jay Powell indicated that the central bank wasn’t contemplating raising rates by more than 50 basis points. The pair then shot up 4.2 per cent on Thursday, breaching the psychological 16.00 handle by close of play.
The ending of last week was evidence that the world is very sensitive, and emotions are yoyoing. Wednesday and Thursday were digestion sessions — even though the Fed hit the bullseye on expectations for policy adjustment, there’s so much nervousness that people don’t really know how to process the huge chunk of information they got hit with.
Markets can’t seem to decide if they want the Band Aid of easy monetary policy ripped off quickly or only peeled off slowly. While markets may stabilise soon, last week’s price action tells us investors should proceed with extreme caution. Whether the SARB follows suit in terms of its hiking trajectory this month remains to be seen as it weighs rising inflation against tepid growth. The supply-side pressures emanating from the elevated oil prices remain entrenched as Brent jumps to US$112 per barrel. The potential for European sanctions on Russian oil are a more meaningful lever than OPEC in terms of directionality.
At the same time in China, investors continue to re-appraise the prospects for China’s economy and asset markets. The onshore renminbi has today broken through the important 6.70/USD level. The USD/CNY losing its anchor has added to global FX volatility and is weighing on China-correlated currencies, such as the Rand and the Brazilian Real. An extra layer here could be the reluctance of investors to hold BRICS currencies as ‘sphere of influence’ geographic preferences start to emerge. With industrial metals taking another leg lower, it still seems too early to call the low on the Rand.
The bottom line is clear enough — elevated inflation and the growing reaction to it in monetary policy are causing a steady increase in bond yields and a steady fall in share prices — both locally and offshore. Along with that, we have a rising dollar and rising commodity prices. How far we’ll go remains in doubt, but the direction is as clear as ever, even after last week’s bizarre trading patterns.
What others say
Business Live – Open the economy to all or we can kiss goodbye to our democracy
But it is also about what happens outside the ANC, and what new political responses emerge. It is equally about what is done by the economic elite and power brokers, black and white. Elites have by and large focused on their immediate vested interests and mostly ignored the growing threat posed by rising economic exclusion and the crisis of joblessness. Now everyone is paying for it as the forces of extraction threaten to overwhelm government, the ANC itself, the economy, business and the society.
Bloomberg – Powell’s inflation strategy takes fire from ex-top Fed officials
In one bit of stark criticism, former Minneapolis Fed President Narayana Kocherlakota compared the Fed’s oversight of the U.S. economy to a country music song about a reckless driver.
“It’s actively turning in the wrong direction — the kind of mistake many a driver has made when hitting a patch of ice,” Kocherlakota wrote last month. The criticism is a notable contrast to the relatively gentle treatment Powell has faced in congressional appearances following an extensive campaign to build relations with both Republicans and Democrats. While he’s still awaiting confirmation to a second term at the Fed’s helm, it’s a near certainty that the Republican renominated by Democrat Joe Biden will win overwhelming support in the Senate.
Moneyweb – Wealthy South Africans are leaving in droves
The return of a few millionaires is beneficial for the economy, however, current headwinds such as high unemployment and skill shortage mean the government must tax the HNWIs at 45% instead of 41%. In 2022, South Africa is forecast to obtain 38% (9.7% of GDP) of its tax revenue from personal income tax, 27.1% from VAT (6.9%) and 15.6% (4% of GDP) from corporate income tax. This forecasted personal income tax exceeds that which is forecasted to be collected from corporate tax receipts. Fortunately, National Treasury is aware that the increase in the tax rate often leads to the emigration of HNWIs which negatively impacts the total amount collected by government.
Financial Times – Transcript: Vladimir Putin ‘doesn’t believe he can afford to lose’ — William Burns, CIA director
“I think he’s in a frame of mind in which he doesn’t believe he can afford to lose . . . I don’t think this means Putin is deterred at this point because he staked so much on the choice that he made to launch this invasion that I think he’s convinced right now that doubling down still will enable him to make progress.”
What we think
We can probably all agree that there are three key themes driving the markets at this juncture. The first is the US Fed’s aggressive tightening prospects as it responds to core inflation above 6%. Importantly, expectations of the Fed cycle remain resolute, with a terminal rate priced near 3.25% next year. The second is the tragedy of the war in Ukraine, which has delivered a stagflationary shock most keenly felt in Europe. And the third is China’s keen pursuit of its zero Covid strategy, which is now triggering a fresh round of growth downgrades and disruptions to global supply chains.
Perhaps the best chance of US dollar stability this week comes from the US April CPI data released on Wednesday. Another leg upward would dismay the optimists.
Our range for the week is 15.90 – 16.50.
Have a great week ahead.