August 08, 2022
MyCURRENCY News | Week 32 2022
What we know
Sometimes it’s best to admit that you’re at a loss. Last week provided such a range of economic data that you could use it as a Rorschach test. Just like the psychiatric examination of what you see in an ink blot, what was discerned in the data probably said more about you than the numbers. Meanwhile, currency markets went on a roller coaster, with the Rand ending the week under pressure from a rebounding US dollar.
The Rand’s recent recovery seemed to have lost momentum as the week started, with the local unit depreciating some 1.20% against the USD. That led to an extraordinary trading session on Tuesday as market volatility boomeranged back upward. House Speaker Nancy Pelosi can claim a starring role with her fraught visit to Taiwan. With the Pelosi show having left the building, the impact of China’s admittedly extreme sabre rattling appears to be also passing.
Adding to the jitters was the Bank of England, which hiked rates by 50 basis points. As ever, it is what the central bank said, and not what they did, that had the greatest impact. The BOE remained hawkish, saying the UK inflation could hit an eye-watering 13%. But the BOE also sounded a loud warning about both the UK and the international economy, signalling a bitter recession was on the way.
The market theatricals reached a crescendo on Friday, with an unequivocally strong July jobs report coming out of the US. The July gain of 528 thousand crushed the estimate of 250 thousand and follows the June release of 372 thousand. The most important read-through is that it now becomes much easier for the US Federal Reserve to raise rates. If the employment market is still strengthening, while inflation remains its highest in decades, it’s hard to see why it shouldn’t. As a result, Friday saw a sharp increase in bets in the fed funds futures market and a rebound in the USD. The belief in an imminent “pivot” by the Fed away from raising rates has taken a knock. But the market is still predicting a rather more lenient Fed than it was in the immediate aftermath of the shocking inflation data for May.
What others say
Moneyweb – ‘Most vulnerable’ emerging markets now face euro recession risk
Eastern European currencies will likely see the biggest declines in emerging markets if the euro drops below dollar parity for a sustained period, given their exposure to euro-bloc demand and gas disruptions, Goldman Sachs strategists said. In late July, the US bank cut its three-month euro target to $0.99 from $1.05.
Financial Times – Macro hedge fund stars enjoy the market volatility
Market moves this year have been particularly favourable for macro funds that seek strong trends. The yield on the interest rate-sensitive two-year Treasury bond has rocketed from 0.7 per cent to 3.1 per cent, as central banks race to try to tame runaway consumer price growth.
Another attractive trade has been betting on the near continuous narrowing of the gap between two-year and 10-year US bond yields. The US yield curve is actually now inverted with short-term rates rising above longer-term ones. Sharp swings in commodity prices have also been profitable bets for many.
ASPI Strategist – A blockade of Taiwan would cripple China’s economy
Alongside its fabrication is an ecosystem of integrated circuit design, packaging, and supplies such as silicon wafers. Taiwan’s total integrated circuit exports earn around US$140 billion a year, and it is also an important supplier of other high-technology and high-value equipment. China is itself the destination for about half of Taiwan’s exports of integrated circuits. Taiwan-sourced chips are central to China’s exports of electronic goods.
Bloomberg – Why British Conservatives went cold on Rishi Sunak
One obvious factor is the person not in the contest — Boris Johnson. His own MPs ended the affair after a series of scandals, but many party members have had second thoughts. Johnson’s supporters portray Sunak’s resignation as the event that tipped the scales against the prime minister. Sunak has had a hard time shaking his casting as Brutus to Johnson’s Julius Caesar. Many Tories clearly struggle with the idea of handing the crown to the man who wielded the knife.
What we think
Last week we wrote “it always remains important to remember that the Rand never moves in a straight line and that any rally will have its own share of pullbacks”.
Sentiment across the markets looks a little fragile this morning and yet the Rand appears to have shrugged off Friday’s shock much more quickly. Up by about 1% this morning, since Friday’s highs and descending once more with its sights set on 16.50/USD it seems.
The implied long weekend with Tuesday being a public holiday makes matters a touch more complicated. It suggests that liquidity will be low and that interest in taking out any fresh positions will also be lacking. Any real directional momentum may need to wait until Wednesday, when US CPI data comes out, although it is important to note that in such thin liquidity environments, volatility can rise if some unforeseen development generates a market reaction.
Looking at the shortened week ahead, only local mining data will hold any interest. It will be important to note how much SA mines have been able to take advantage of the recent commodity prices.
Our range for the week: R16.50/USD – R17.00/USD.
Have a great week ahead.