October 12, 2021
MyCURRENCY News | Week 41
What we know
In FX markets, there must always be a winner and a loser. A series of zero-sum games, one currency or another gains in any pair. And the market is now telling us some startling things. One is that the Dollar is in an upswing, which on the face of it implies that times are bad for the global economy; the Dollar generally prospers when people are risk averse.
The same cannot be said of the Rand, despite the strong fundamental support afforded by the uptrend in commodities prices. Spot Rand is flailing around 14.90 against the greenback and spent most of last week oscillating between 14.80-15.20 in anticipation of Friday’s all-important non-farm payrolls report.
In the case of the Dollar, it is benefiting both from concerns that the latest wave of Covid-19 and China’s problems will dent global growth, and also from the perception that the Federal Reserve will need to grow more hawkish from here. As Deutsche Bank put it when slightly upgrading their forecasts for the end of the year, “persistently stag-flationary dynamics — lower growth but a hawkish Fed — leave little room for a Dollar downtrend.” The corollary is that if Covid-19 clears, China muddles through and reflation resumes, this latest dose of Dollar strength could look like a head fake, but that is for the future.
Last week was filled with uncertainty in the markets. But how much did it matter, and what does it tell us about the future? It’s a dilemma for investors and it’s a dilemma for people like us who have to cover markets and provide views on both the short- and long-term direction of markets.
Suffice to say, you can only get to the long term by surviving the short term, and in every day’s noise there is some signal to be detected. But it’s difficult to find that signal, and it’s easy to fall into the trap of retrofitting explanations to fit the way the market happened to behave. And of course, it’s easy to drown out any signal you find with all the noise.
So, here is an attempt at some of the salient points from an undeniably dramatic week:
• Federal Reserve policy makers will likely look through September’s weakening in the US labour-market recovery and take their first step to removing pandemic stimulus at their meeting next month;
• Bond yields, yield curves, and inflation break-evens have all risen sharply, but all remain within their ranges for the year;
• Where there does appear to be a breakout is in the Dollar — its highest since the successful vaccine trials were announced last November against both emerging market currencies, and the other major developed market currencies.
What others say
Business Live – SA funds consistently fail to beat global indices
They can be niched, nimble and have no need to behave as closet index trackers. It’s not hard to beat the market, provided you don’t do something stupid, he argues. I am not sure I agree. Beating the market is not like auditing a set of accounts, which anyone with enough experience and basic competence can be relied on to complete successfully. Luck plays a far greater part in investment management.
Daily Maverick – Looming global energy crisis could be the match that sets South Africa on fire
It is oil, however, that is perhaps of greater concern. Analysts point to substantial demand/supply mismatches in global oil markets, largely as a result of post-lockdown supply chain disruptions and higher-than-expected demand from economies such as China and the Eurozone. Should prices continue to rise, one could expect to see oil prices of about $100 or more a barrel.
Financial Times – Global economic rebound hit by supply squeezes, energy costs and inflation
Advanced economies have hit these bumps in the road as they came close to recovering lost output from the crisis which had suggested a historically promising recovery. But in emerging and low-income countries, the signs of longer-term scars are becoming more evident, especially where governments and central banks cannot easily boost demand without running into even more difficult inflationary pressures.
New Yorker– The challenges of regulating Cryptocurrency
One of the biggest questions facing the industry is whether tokens—which are tradable assets that may serve as the units which denominate cryptocurrencies but can also represent other things of value—qualify as securities; if so, they would be subject to securities laws and regulations. And if they aren’t securities, what are they? The answer to that question would help determine which other agency might have oversight of them. To many in the field, the messages coming from the S.E.C. in the past few years have been confusing.
What we think
Last week we stated “Until Friday, the Rand still feels to be a little lost and waiting for direction. The USDZAR seems to be closer to our perceived lower bound of its fair value trading range and presents a strong buying opportunity…”
Regarding market dynamics ahead of the local open, risk appetite appears to be waning with most EM currencies on the back foot against a steadying USD. Energy price gains have been lifting South African import costs just as recent strength in the Dollar has been weighing on prices of the commodities extracted and exported from South Africa, making for a negative influence on South Africa’s surpluses for internationally traded goods and capital flows.
Fortunately, the weather is getting warmer, so hopefully electricity demand will start to moderate somewhat and help to keep the lights on.
Last week’s tumultuous price action, especially as it pertains to the Rand, may well have been little more than a random walk, in the greater scheme of things. There’s a risk of being drawn into calling play-by-play on a ping pong game. But if investors want to focus on something, it should be that investors are latching on to the notion that central banks are beginning to end the party.
Our range for the week 14.80 – 15.20.
Have a great week!