November 14, 2022
MyCURRENCY News | Week 46 2022
What we know
I’ve long been an advocate of the phrase “Even a broken clock is right twice a day” and this week I get to apply it to one of the views we’ve held for the past few months: that this year’s USD bull-run has become over-extended and that a pullback is both necessary and imminent. Turns out we were right! Eventually…
The premise for this view was that at some point we would see data points that suggested the start of a cooling of the US economy as the effect of the Fed’s hawkish monetary policy started to kick-in. Furthermore, the base effect of rising inflation and growth would inevitably mean that rates of increase in these measures would start to taper off at some point. To us, the call for a weaker USD was therefore fairly predictable; the timing, however, was less certain, as we watched every months’ inflation, employment and GDP data points with intense interest, hoping something would give and that the beginning of the end of the Fed’s extreme hawkishness may start to move into sight.
Last week’s inflation data was the first time in a while that we’d seen a miss in an important indicator and the market has certainly reacted accordingly, pushing the USD 3.5% lower and bringing the loss since September’s high to 7%. This move has also seen general risk appetite pick up and equity markets rally very strongly (the S&P bounced 6.6% over two sessions), which in turn has seen a solid move in emerging market currencies, including the Rand. Having flirted with the 18.50 level over the past month, the ZAR.USD is currently trading at 17.28, its best levels since mid-September.
The Dollar sell-off ended up being the big feature of the week, overshadowing what turned out to be something of a damp-squib outcome from US midterm elections. The power-shift many thought may come to fruition did not materialise, with the Democrats’ standing in both the Senate and House looking set to remain largely unchanged. It’s a somewhat strange experience to have witnessed such a “normal” political event take place, given the almost surreal freak-show that global politics has become over the past 6 or 7 years. For all his mumbling and ghost handshakes, and whatever one’s political leanings, it’s perhaps encouraging to see the fundamentally decent Joe Biden slowly gain in popularity.
Elsewhere it was a sensational week in the world of Crypto, with FTX.com, until recently one of the largest cryptocurrency exchanges in the world, collapsing from industry darling to bankruptcy in a matter of days. The story behind it is fascinating and extremely convoluted, with its founder Sam Bankman-Fried having gone from a smart 25-year-old with ambition to a 30 year-old worth over $30 billion, to potentially a jail-bird depending on how investigations play out. Cryptocurrencies across the spectrum suffered heavy losses as investors liquidated holdings in order to protect themselves against possible contagion across other exchanges. Never a dull moment, indeed.
What others say
VOA News – US inflation numbers show some reason for optimism
Prices for goods and services in the United States rose 7.7% during the 12-month period ending in October, the lowest annualised rate since January, leading to speculation that the efforts of the Federal Reserve to tame inflation through interest rate hikes may be bearing fruit.
ZeroHedge – Goldman, TS Lombard confirm Fed inflation target hike now inevitable
For much of the past year (and certainly at the time, more than a year ago, when the so-called experts, central bankers and macro-tourists were still yapping about “transitory inflation” and other things they were wrong about and do not understand), we were warning that at some point the Fed will realise that it is simply impossible to contain supply-driven inflation through stubborn rate hikes which instead would lead to a dire alternative – millions in mass layoffs and newly unemployed workers – and will revise its 2% inflation target higher, a move which will send every risk asset, from high-beta trash and meme stonks, to blue-chip icons, to bitcoin and cryptos, limit up.
Bloomberg – Sam Bankman-Fried fooled the Crypto world and maybe even himself
Something was wrong. Just how wrong is only now becoming blazingly clear. On Friday, after one of the most harrowing weeks in the young, freewheeling world of cryptocurrencies, his digital-asset empire – 130-plus entities in all – spiralled into bankruptcy.
Daily Maverick – The US midterm elections are now almost history, so what’s next for America?
The results of these elections were a stunning repudiation of what had been presumed (or at least hyped by Republican, partisan pollsters) to be an incoming electoral “red wave”, as well as a rebuttal to the tradition of incumbent presidents being embarrassed by midterm electoral results. These elections were also supposed to be in tandem with the impact of the veritable colossus that was presumed to be Donald Trump (and, perhaps, to a degree, even Trumpism as a kind of inchoate ideological framework). They were going to be the backdrop for Trump to announce his next try for the presidency as well, this coming week. But, in truth, that wave never made landfall.
Visual Capitalist – What types of people appear most on international currencies?
On currencies throughout the world, you’ll see everything from revolutionaries to poets featured prominently. But how does this mix of notable people break down quantitatively?
This graphic by NetCredit shows the types of people, by their main occupations and roles, that are featured on banknotes and coins worldwide.
What we think
Last week we wrote that “…although the ZAR always has the potential to hold a sting in the tail and exhibit volatility, (there) are signs that the bulk of the USDZAR surge is behind us and that investors worldwide are starting to rethink their long USD strategies from current levels.”
So here we are with the USD finally on the back-foot and global markets breathing a sigh of relief. It’s quite obvious that one data point doth not a trend make and we now look forward to seeing what the coming weeks bring as the final data points of the year start to release. Nevertheless we are hopeful that we’ve perhaps seen the froth being removed permanently from the bullish USD rally. Bear in mind, that although a 7% drop from the highs is significant, the Dollar remains strong at current levels, up 12% on the year and still around 20-year-highs.
Based on this, our outlook for the US Dollar Index (DXY) can be broken into three ranges:
- 104-106, should data continue to point to a cooling off of the US economy
- 106-108, being our base case given what is currently known
- 108-110, should the next data releases hint that last week’s inflation figure as perhaps a false indicator
As such our base case for the ZARUSD, based purely on our USD outlook, between now and year end is 17.10 – 17.45.
Looking more directly at the Rand and general risk appetite, we don’t see a reason to be bearish into year-end (notwithstanding any unknown surprises):
- We’re 5 weeks from the ANC’s NEC conference and there don’t seem to be any particularly concerning alarm bells ringing, giving us hope that any ZAR impact will be neutral to slightly positive
- The Eskom situation seems at least stable for now and given the potential impact this may have on the currency, we take a neutral short-term outlook here
- The Russia-Ukraine war lingers on and with Winter approaching we would hope that there is unlikely to be any enormous escalation in the conflict
If the above points are true we can perhaps allow for an up to 2% additional strengthening of the Rand itself, (i.e. beyond just Dollar weakness), meaning that our outlook between now and 31 December is as follows:
- ZAR.USD 16.75 – 17.45
- ZAR.GBP 19.95 – 20.60
- ZAR.EUR 17.50 – 18.00
Have a great week ahead.