June 27, 2022
MyCURRENCY News | Week 26 2022
What we know
Not a lot changed in FX markets last week, despite a late Friday rally in most EM currencies. The Rand appreciated to 15.80 against the USD – having opened the week at 16.00. Helping the rally has no doubt been last week’s re-pricing of tightening cycles around the world where 50-75bp of expected tightening were removed from some money market curves in just a few days. Driving that pricing seemed to be the much broader discussion – including from Federal Reserve Chair Jerome Powell – over the risks of recession.
Locally, headline CPI exceeded expectations, surging beyond economists’ consensus of 6.2% y/y to register 6.5% y/y. Surprisingly, the Rand did not bat an eye. Like its global peers, SA’s inflation trajectory is headed north at a rapid pace, with a breach of 7% y/y likely in June. The immediacy of second-round effects and the overarching risk of uprooting inflation expectations will prove challenging for the SARB, which gathers again in July. Suffice it to say that a hike is on the cards – it’s the magnitude that is up for discussion. If you haven’t already tightened the proverbial belt, now might be the time to start.
Just as we now know that inflation isn’t “transitory,” and we’ve moved on to the much harder questions of how high it could go and how long it will take to bring under control, so we need a similar attitude to recessions. It’s going to happen. But how bad it is, and what we can do to minimise the pain are very much live questions.
The two great exogenous shocks of 2022 should determine whether this continues. First, there is China’s economic travail as it continues its Zero Covid lockdown policy. The country is the ultimate consumer of last resort for oil and for a range of other commodities. Some are convinced that the authorities will soon have no alternative but to release credit flows once again and spark another upsurge.
The other crucial outstanding issue is, of course, the war in Ukraine. In the last few weeks, the news flow has turned much more negative from the perspective of Ukraine. The odds appear to be strengthening that Russia will succeed in its reduced war aims of conquering all of the Donbas region. That also tends to increase the chance that the war then simmers down into another of the world’s long running and unresolved but stable conflicts. Or it’s possible a deal will be reached. It’s hard to imagine an outcome in which the West can easily find a justification for lifting economic sanctions, but the really scary tail risks appear to be reducing.
What others say
Daily Maverick – The rand no longer sets the dogs barking
It’s all a kinda no-barking situation. And that is surprising because when the consensus is that inflation is going to accelerate by 6.2% year on year, and it rises by 6.5% – and takes it out of the Reserve Bank’s target range – you expect a little currency action.
What is happening here? Lots of things, as there always are with currency movement.
First, although this inflationary increase seems worrying, and of course it is, a lot of the increase sits in the petrol price.
Moneyweb – Load shedding: Stage 4 and counting
Eskom earlier declared a dispute after wage talks with unions reached a deadlock and requested an expedited date from the Commission for Conciliation Mediation and Arbitration (CCMA) for a conciliation meeting this week. If that fails, the matter will be set down for arbitration.
Eskom cannot keep the lights on with its emergency reserves of diesel turbines and pumped-storage schemes, as both the diesel and water levels are low. The existing reserves have to be preserved to balance the power system if further trips occur due to the unlawful action of strikers and to compensate for the supply deficit.
Bloomberg – Metals haven’t crashed this hard since the Great Recession
Chinese manufacturing activity is already shrinking, and S&P Global gauges on Thursday showed European manufacturing output contracting for the first time in two years, while US output hit a 23-month low. Even so, the magnitude of the accelerating selloff in copper and other industrial metals suggests that investors are betting on much steeper declines in demand in the coming weeks.
Financial Times – Rise of ETFs ‘destabilising’ emerging markets
Moreover, passive index-tracking funds are more reactive to shocks than actively managed ones, the research found. Within that, investment flows to emerging market-focused ETFs are even more sensitive to global financial conditions than those of the equivalent mutual funds, rendering ETF money the least reliable of all forms of funding.
What we think
Last week, we stated “we think that Fed speakers will have a much bigger impact on global market sentiment and the FX market this week”.
Currency markets seem to be adopting a step out of the noise, wait-and-see approach heading into the week. An observant colleague pointed out that Sintra is coming up June 27-29. Sintra is the location of (and nickname for) the ECB Forum on Central Banking. It’s the Jackson Hole of Europe, a place where global central bankers go to share ideas and groupthink over expensive wine. All the big hitters will be there: Lagarde, Bailey, Powell, etc It remains to be seen what will come of the forum. We have seen markets move sharply in previous years following comments that emerged from Sintra.
Locally, political risk premium doesn’t appear to be priced as yet, although there are mumblings of growing concern over the domestic landscape following recent incidences. Perhaps the ongoing industrial action at Eskom over wage disputes could be a catalyst for a slight sell-off if the protests continue to cause operational disturbances, worsening the state of load-shedding.
Our range for the week: R15.70/USD – R16.05/USD.
Have a great week ahead.