September 28, 2021
MyCURRENCY News | Week 39
What we know
A week that started with serious concerns around the impact of a potential Evergrande default, ended with a broad-based rally in emerging market currencies. In FX markets, it is no surprise that the dollar saw its upside capped as risk sentiment improved. What appears more surprising is how the dollar struggled to find any kind of support on the back of the more hawkish than expected FOMC announcement on Wednesday.
The monetary menagerie we witnessed last week was confusing to say the least. Beyond hawks (who want tighter money) and doves (who want easier money), there is also the retinue of bulls and bears, all braced for potential black swans, such as viruses. But as it stands, it looks as though the world is finally ready for a new and apparently much less menacing animal: the taper.
The bottom line from last week’s meeting of the Federal Open Market Committee, as communicated by Chairman Jerome Powell, is that the taper will arrive in November, and continue munching away at the Fed’s monthly purchases of assets until they are all gone, in June of next year. At that point, the taper can retire not very graciously into the sunset, its proboscis swaying gently in the breeze. Everyone can then start worrying about rates.
Fatigued by the US Fed, local market participants waited in bated breath for any indications of policy tightening from the South African Reserve Bank. There was little if any sign of the Rand being fazed when the South African Reserve Bank’s quarterly projection model reiterated its prescription from July, which suggests a 0.25% increase to the cash rate from 3.5% to 3.75% could be necessary in the final quarter. Meanwhile, the 2021 inflation forecast was lifted from 4.3% to 4.4%, although projections for 2022 and 2023 were left unchanged. The SARB’s updated inflation forecasts are one reason why the bank is unlikely to raise interest rates before the final quarter and could even see the South African cash rate left unchanged until sometime in the New Year.
It is inflation that central banks are seeking to manage, within the context of predefined targets, when they tinker with interest rates and the SARB’s projections suggest that South African price pressures will remain tamed around the midpoint of the three-to-six percent target over the coming years. Low core inflation suggests, if anything, that price pressures were simply not very prominent within the collection of risks still faced by the South African economy this summer and could yet give the bank’s quarterly projection model cause to further delay its prescribed date of lift-off for interest rates.
Meanwhile, the market’s reaction suggests stunning insouciance. It took a long time for the markets to wake up to the threat posed by the China Evergrande Group imbroglio, then there was the spasm of selling on Monday morning. With no obviously good new news about Evergrande, and some rather unwelcome news from the Fed, there were plenty of excuses to sell EM currencies.
What others say
Business Live – Busy time for central bank watchers
The mystery is the actual time frame of “soon”. Perhaps with a view to previous episodes of market tantrum it does not want to spook investors who have been used to a steady diet of low interest rates and liquidity injection from quantitative easing programmes. Its higher inflation outlook, as in the UK, needs to be balanced with expectations that growth will slow, leading markets to expect that hikes, if they come, will only start in 2022 and be gradual.
Daily Maverick– SA Revenue Service: Closing the tax gap is easier said than done, say the experts
Of course, eliminating the tax gap in full is not simple. The first step is to accurately assess the size of the gap and pinpoint problem areas. “Estimates will not take us forward – if you want a coherent policy to address compliance you need to build capacity to do so,” says Professor Ada Jansen, associate professor at Stellenbosch University. This assumes that the capability, processes and technologies necessary are in place. It also requires access to third-party data – for instance that held by the South African Reserve Bank, for comparative purposes.
Financial Times– Evergrande’s troubles show China is just as susceptible to capitalism’s ill effects
The problem: what happens in China no longer stays in China, which is the main engine of global growth. In many ways, China follows the same deformed model of capitalism as most western countries, only more so, taking on ever increasing levels of debt to generate less and less growth.
Bloomberg– Money market funds are getting ready for a debt-ceiling debacle
Of course, money market funds can also park excess cash in the Federal Reserve’s Reverse Repo facility (RRP), which has already seen a massive uptick in usage with a record $1.35 trillion reached last week. As Credit Suisse AG Strategist Zoltan Pozsar put it on a recent Odd Lots episode, the RRP acts as “a mechanism that enables the system to kind of clear,” allowing excess cash that can’t be handled by banks due to balance sheet constraints to flow into money market funds and on into the Fed facility instead.
What we think
We cannot look to the Rand to provide any redemption as the spot unit backtracks on last week’s gains to align itself with currency moves in most other EM markets. Once again, the justification for the sudden swing isn’t entirely clear. Unfavourable global commentary regarding commodity prices, relevant to SA’s export basket, paired with generally mixed global data and a modestly stronger US Dollar could explain a portion of the unwind, yet the abruptness of the rand move is unsettling. Limited data and event risks should allow for some measure of consolidation, with a move towards USD/ZAR15.05 opening the way for further downside moves.
The Dollar heads into the new week gently on the bid side. To be honest, we were surprised that it did not rally more on a set of hawkish Fed Dots that showed a tightening cycle way above anything priced in money markets. The lasting impression from last week is that for markets, the taper no longer has the power to induce fear in the way that it did eight years ago. That Powell was about as hawkish as he could be, and yet the US Dollar barely moved, does at least prove that one other market animal didn’t make an appearance. The post-Evergrande bounce has some life in it. It’s no dead cat.
Our range for the week ahead is 14.80 – 15.20.
Have a great week!