May 24, 2022
MyCURRENCY News | Week 21 2022
What we know
The dizzying volatility continues.
Last week, we saw the Rand enjoy a brief rally followed by a pause on Friday; the dollar has maintained its momentum, and CPI steadied at 5.9% in the year to April. All of this was against the backdrop of a welter of macroeconomic data, corporate earnings results, and central bank policy announcements that were conspicuous for their lack of major nasty surprises.
The SARB MPC members were close to unanimous when voting on Thursday to lift the cash rate by 0.50% to 4.75% in a monetary policy decision that was in line with the expectations of economists but not quite fully baked into financial market prices. That didn’t stop the Rand from benefiting, ending its worst streak of weekly losses since April 2020. In a world of correcting equity markets, rising volatility, and persistent risk aversion, perhaps the SARB’s bold rate hike has bought the ZAR some short-term insurance. Suffice to say, those who’ve been waiting on the sidelines waiting patiently for the exchange rate to moderate may now look to take advantage of these levels while we still have them.
While concerns about the risk of slower GDP growth were evident in the SARB’s communication, one reason for optimism on inflation is that commodity prices might be beginning to turn. The most realistic hope for this is in industrial metals, which received a massive boost in the first few days of Russia’s invasion of Ukraine. They’ve given up those freak gains while the slowdown in activity in China, exacerbated by Covid-zero shutdowns, has brought down demand for metals there.
And then there is oil, whose price has consolidated somewhat since the shock of the invasion. The politics of Europe’s attempted oil ban will continue to drive crude prices — but it’s concerning that gasoline futures, which fell with crude as the war in Ukraine continued, have shown little signs of receding. Here at home, news headlines are dominated by reports of an expected June petrol price hike. The end of temporary fuel price relief adds to an expected sharp jump in the price of petrol next month – the question is, will further relief or a new petrol price calculation be revealed before the petrol price rises again?
Data and policy events aside, our domestic setting is still littered with disquieting news. Loadshedding continues to be a thorn on the economy’s side, and although Eskom reduced the level of severity to stage 2 after last week’s breakdown, the utility has warned that the grid remains unstable as it battles to bring certain units back online. SA’s energy availability factor has slipped to 62% versus Eskom’s own target of 82.7%, with executives calling for between 4,000MW and 6,000MW of new capacity to ‘steady the ship’, as it were. All the while, public sector wage negotiations remain tenuous as further strike action is levelled.
What others say
Business Live – Higher rates give bankers a reason to smile
“The 125 basis points of rate increases we’ve had, with 50 of those this week, help banks’ bottom lines. Interest margins have been creeping up since the rate cycle began, with the industry sporting a healthy 3.86% in March (the latest data available, though still below the pre-Covid levels of 3.89%). Margins had been growing anyway, driven largely by savings on banks’ cost of funding. Depositors have been putting more money into call accounts relative to fixed deposits, cautious about liquidity in these uncertain times. That means banks have had to pay less interest.”
MoneyWeb – Cratering markets blowing a bigger hole in consumer psychology
“Yelena Shulyatyeva at Bloomberg Economics notes that wealth effects work with a lag and much of the market’s volatility has yet to land on sentiment. She uses a model that adds real estate to the psychological mix. Home-price gains slowed to 12% in the first quarter, and if that were to be annualized, she estimates stocks would have to drop 30% from their peak to “wipe out” the wealth effect from housing. If home-price gains slow further to 5%, the drawdown in stocks would already be large enough to scotch sentiment.”
Daily Maverick – Government rejects 10% pay hike demand by public sector trade unions
“The Treasury wants to wrestle down the cost to remunerate public servants because, at R682.5-billion in 2022, it gobbles up 34% of the government’s total expenditure. Cutting the public sector remuneration bill will also pave the way for the government to reduce its ballooning government expenditure and debt.”
Financial Times – Why AI is everywhere except your company
“The consequence is a large productivity gap between “frontier” businesses and the rest. The quantity of information is greater in service industries than in manufacturing, so service companies are those in which differentiation is largest — and those without AI risk falling further behind.”
What we think
What thrills and spills await this week?
Last week we stated, “Our rather skewed reliance on China as a mass importer of our goods is thus heavily affected by big swings like this and will certainly hurt us sooner, rather than later.”
Helping this period of USDZAR pull back has been last week’s stability in the Chinese renminbi (CNY). The overnight 15bp cut in the 5-year Loan Prime Rate – aimed at supporting the property sector – has instilled a little more confidence in Chinese assets markets. However, the emerging market environment still looks challenged given that the stronger US dollar is effectively exporting tighter Fed policy around the world.
The DXY could correct a little lower to 102.00, but we still see this as bull market consolidation, rather than top-building activity. Not until the Fed pours cold water on tightening expectations should the dollar build a top.
Our range for the week is 15.60-16.00.
Have a great week ahead.