June 21, 2022
MyCURRENCY News | Week 25 2022
What we know
“The sky is falling in” – that’s the perception of most market participants, judging by last week’s market activity. To be fair, on year-to-date basis, the Rand hasn’t fared that poorly against the US dollar, down by 0.37% compared to the worst-hit Turkish lira, which has depreciated by a whopping 30%. That tidbit doesn’t reflect the volatility from last week though. The Rand continued its slump from the previous week, tipping the USD/ZAR16.19 mark in line with the capitulation in most commodity currencies before the FOMC rate decision.
Unless you were living on Mars, and even there they probably heard the news, the FOMC did hike the Fed Funds rate on Wednesday by 0.75% to a target range of 1.50%-1.75%, as anticipated by the market. All nice and hawkish you say. Indeed, it was but the result was an intraday ‘buy everything rally’, as sentiment rebounded. The Fed also downgraded its US growth forecasts for 2022 and 2023 but remained adamant there would be no recession. Not so sure on this one given their track record over the last couple of years.
Fed Chair Jerome Powell did try to play the same trick he played on the last meeting – lobbing some random dovish forward guidance into the hawkish message. “Don’t expect 75bp point moves to be common” was the verbiage this time, vs “75bps isn’t something FOMC is actively considering” (uttered 42 days before a 75BP hike). The USDZAR did the same thing on both FOMC meetings: it ticked up ever so slightly, before tumbling down on the silly dovish throwaway line during the press release. Fool me once, fool me twice, fool me thrice?
In the rest of the EM currency space, the rally was rather uneven, Asian currencies booked only modest gains and as the reality of a widening interest differential and a slowing US economy dawn, those gains are being reversed this morning. Bitcoin managed a dead-cat bounce of USD 20,000.00 but crypto remain in the naughty corner. Considering the week’s carnage, the Rand strangely held its own against its EM peers, deriving fundamental support from local determinants with market participants seemingly overlooking the political noise, suggestions to import Russian oil at cheaper prices and a devastating truck blockade of key routes to Johannesburg.
What others say
Bloomberg – Fed’s Rate Hike Unearths Bounty in Pockets of Emerging World
It sounds counterintuitive: Risk assets are typically hammered during market volatility and emerging markets have indeed been hurt, with a key gauge of equities fresh off its worst week since March. But with much of that turbulence stemming from assets in the US — the world’s defacto safe haven — amid mounting concerns about the growth outlook there, the relative appeal of developing nations is growing.
NPR – Fear The Vibe Shift: Are We Entering A Recession?
It’s being whispered and murmured about. The president is facing questions about it. Business leaders and investors are already bracing for it. The specter of recession is once again rearing its monstrous head. It’s feasible that the economy could chug along without any bumps or crashes. But boom-and-bust cycles remain a seemingly inescapable feature of capitalist economies.
Business Tech – South Africa expected to break inflation ceiling this week
These inflation figures, which are not unique to South Africa, are expected to be felt across the global markets as central banks look to rate hikes to bring them under control. In South Africa, inflation reached 5.9% in April 2022.
By 31 May 2022, the Reserve Bank’s Monetary Policy Committee had raised the repo rate by 100 basis points to 4.75% and indicated that there were likely to be further increases in the second half of the year.
The Guardian – Farmgate’ threatens Cyril Ramaphosa’s South Africa re-election bid
Ramaphosa’s election to the leadership of the ANC and subsequent victory in national elections four years ago raised hopes South Africa had reached a turning point after years of soaring unemployment, crumbling infrastructure and flagging economic growth. But entrenched opposition within the ruling party, the president’s own consensual approach and the Covid pandemic have all contributed to widespread disappointment in his term in office.
What we think
Last week we wrote “Inflation surprised to the upside slightly. Though, what is monumental is that this was the highest print in 40 years for the US and subsequently sent the Dollar on a rampage”.
The path of least resistance seems to be lower stocks and higher USD. Our view in this hiking cycle is that the US Fed and other central banks keep hiking until they break something. What they need to break in this cycle is the price of oil and gas, even if that means causing a recession.
That said, we think that Fed speakers will have a much bigger impact on global market sentiment and the FX market this week, with the main event to watch being Fed Chair Jerome Powell’s two-day testimony to Congress.
Unless we see some explicit pushback against a 75bp hike in July, markets may consolidate their pricing for a Fed rate around 3.50% at the end of this year, which should offer some underlying support to the dollar. Incidentally, global risk appetite may struggle to recover just yet especially considering the recent developments in the gas market and lingering concerns about China’s economic outlook, all of which should continue to fuel demand for defensive dollar positions. A return above 105.00 in DXY in the short term is our base case.
Our range for the week: R15.90 – R16.20.
Have a great week ahead.