August 22, 2022
MyCURRENCY News | Week 34 2022
What we know
It’s not often that you associate The Bangles with prescient outlooks on global markets but as I look across the trading screens, the song ‘Just another Manic Monday’ is humming through my head. The second line of the chorus is even more poignant, “I wish it was Sunday.” I have a feeling there are many investors feeling the same way.
The Rand was always going to start the week on the back foot after a bleak Friday session. Markets took fright at hawkish comments from July’s US FOMC minutes and fears of higher rates saw EM currencies get routed. The US Dollar Index surged through 108.00, with the ZAR for one, depreciating more than 5.00% on the week. All this as various domestic hurdles such as slowing growth, political uncertainties and the unpredictability of Eskom’s grid capacity also keeping local sentiment weak. It’s evident though that the main catalyst for the EM currency sell-off was coming from offshore.
While we didn’t have any major economic data releases, recent central bank comments seem to have set the tone for the coming weeks. Reading through the FOMC minutes from last week, we took away three key points for the FX market:
- The Fed felt that the appreciation of the dollar was helpful in suppressing import prices and contributing to the Fed’s objective of bringing inflation back to its 2% target. In other words, the Fed seems to welcome dollar strength and there were no linkages of dollar strength depressing any sectors in the US economy.
- The Fed noted that the dollar had continued to strengthen in the inter-meeting period, especially against the euro. The Fed blamed the move on wider interest rate differentials.
- The Fed acknowledged the risk of tightening more than necessary – a risk that in effect justified slowing the pace of rate hikes and shifting to a more data-dependent approach. Within FX markets, risk-sensitive currencies may perform a little better on the view that the Fed will eventually shift away from the period of more forceful interest rate adjustments much sooner.
There are still three big event risks ahead of the 21 September FOMC meeting which will help determine whether the Fed hikes 50bp or 75bp. These are the Fed’s Jackson Hole symposium (25-27 August), the August jobs report (2 September) and the August US CPI data (13 September).
How should FX markets trade beforehand? The surge in gas prices have been dominant in FX markets in recent weeks and the theme of energy dependence suggests the dollar remains stronger against the likes of the euro. The wild card of another Chinese Yuan devaluation also hangs as a spectre over most currencies (except the dollar), but many assume the People’s Bank of China will not allow the renminbi to substantially depreciate ahead of the all-important National Congress sometime in November. Let’s see.
What others say
Business Tech – Capitec on the threat of South Africa being greylisted
Speaking at a media round table (19 August), Wim de Bruyn, Capitec’s chief information officer, said that the bank is actively working with the South African Reserve Bank (SARB) on avoiding a greylisting.
He added that the banking industry as a whole is doing everything it can and is cognisant of the new tweaks, enhancements and additional requirements that are being put in place to mitigate possible money laundering and terrorist financing in the country.
Bloomberg – Putin tears a giant hole in a critical German balance sheet
Without a massive bailout coordinated last month between the German government and Finnish majority owner Fortum Oyj (which in turn is majority owned by the Finnish state), Uniper would have been sunk. Further credit rating downgrades risked triggering collateral calls, draining the company of cash.
Business Tech – Perfect storm has hit middle-class South Africans
This slowdown of funds entering the economy via credit channels will slow down the inflation rate as less money chases the same amount of goods. This may seem logical, however, what is the impact on economic growth when the economic policy is trying to slow down the rate at which credit is being used?
Financial Times – World’s largest sovereign wealth fund says cyber security is top concern
The fund’s top executives are even concerned that concerted cyber attacks are becoming a systemic financial risk as markets become increasingly digitised.
“I’m worried about cyber more than I am about markets,” Tangen told the Financial Times. “We’re seeing many more attempts, more attacks [that are] increasingly sophisticated.”
What we think
Last week we highlighted “The optimist in us hopes this week cements the Rand below the resistance level of R16.50, though that ‘rubber band’ effect may mean a pullback after such a strong rally is plausible”.
Catching our eye this morning is news of Chinese banks cutting their loan prime rates to support the mortgage sector. The news serves as a reminder (as did the PBOC policy rate cut this time last week) that the Chinese economy is slowing (USD/CNH now trading above 6.84) and producing very difficult trading conditions for a country such as South Africa, trapped between high imported fuel costs on the one hand and slowing export markets on the other.
The week ahead will hold several data releases for South Africa too, including July CPI and Q2 unemployment data. Technically, topside momentum for the USD-ZAR is building towards the 17.10 mark, which lines up with a previous resistance line that stretches to the highs reached in mid-July. Here, the USD/ZAR retesting those levels will be key, with a break likely to open the door for a move towards previous highs around 17.20-17.30.
Our range for the week: R17.00/USD – R17.30/USD.
Have a great week ahead.