December 13, 2021
MyCURRENCY News | Week 50 2021
What we know
It is always tempting to try and construct a narrative to explain a series of disconnected events. In the last few days, trying to impose a pattern on short-term market movements has moved from difficult to near impossible. For those in the thick of trading, you can probably come up with a narrative that neatly explains everything that has happened of late. The rest of us can meekly observe that markets get volatile when investors have left themselves over-exposed and an unexpected piece of news comes along.
The Rand had been quick to rebound through early December from late losses inspired last month by the renewal of curbs on travel between parts of Africa and the Northern Hemisphere, although we saw the rally fade away by Thursday. The USDZAR eased lower from last week’s highs on Thursday as the US dollar lifted from its lows for the week against most currencies amid signs of a cooling in international investors’ appetites for risk assets, enabling even a recently beleaguered GBP/ZAR to stabilise.
The local currency eased further after Statistics South Africa noted that the country’s lucrative goods trade surplus retreated from its own recent highs in the third quarter. The data followed other figures confirming a retrenchment of the overall economic recovery last quarter, which many economists have connected to July’s civil unrest.
So, how do we explain what we are witnessing in the FX markets lately? Ultimately, we think it’s being driven more by prior positioning than anything else. Plenty of us have been calling attention to rising inflation and cautioning that this likely means that the US Fed will have to tighten monetary policy. That leads to overcrowding among those betting on higher rates and a higher US dollar. In those conditions, the advent of a new virus variant and a dash of ambiguity in the economic numbers can cause a big mess.
That said, more news keeps coming out suggesting that omicron may well be milder than delta. If true, the news could almost perversely be good if it takes over as the dominant variant. Meanwhile, many sources of geopolitical tension (such as Iran, Ukraine, and Taiwan) are going almost completely under the market’s radar.
What others say
Business Live – We’re technically trapped in low growth for the next decade
Like the doctors still searching for new medication for an existing illness, policymakers continue to administer the same medication, hoping to revive this economy out of its “critical but stable” state. Worse still, and to continue the analogy of the economy as a patient, the doctors that have failed to revive flu patients continue to be given the responsibility to cure cancer patients.
Business Tech – Expect some lockdown restrictions in South Africa this week: Economists
Specific concerns have been raised around the high number of gatherings that are expected to take place over the festive break, with reduced numbers at gatherings being considered. Under South Africa’s current adjusted level 1 lockdown, the number of people permitted to attend indoor gatherings is 750 people, while up to 2,000 people may attend outdoor events.
Financial Times – A crisis of trust in Britain’s prime minister
A big risk now is that distrust in Johnson will hamper the adoption of restrictions that are vital to combat the highly infectious Omicron variant. The prime minister faces a rebellion leaving him needing Labour support to pass “Plan B” measures for England, and a potentially bigger mutiny against further steps. Johnson is fighting for his political future with Tory MPs among whom the most vocal and aggressive are Covid-sceptics.
Bloomberg – What could possibly go wrong? These are the biggest economic risks for 2022
Adding to risks this time around are already-elevated asset prices. The S&P 500 Index is near bubble territory, and home prices accelerating away from rents suggest housing-market risks are bigger than at any time since the sub-prime crisis back in 2007. Bloomberg Economics modeled what happens if the Fed delivered three hikes in 2022 and signaled it would keep going until rates reach 2.5%, pushing Treasury yields up and credit spreads wider. The result: a recession at the start of 2023.
What we think
Last week we wrote: “…the emerging basket seems to be gaining some traction this week as Omicron fears subside”. We cannot look to the Rand to provide any redemption as the USDZAR 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 current account, 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.
It’s a big week for global markets, with three of the biggest central banks announcing their interest rate decisions, all of which can make a pensive backdrop ahead of the holidays. More event risks should allow for some measure of volatility, with a move towards USD/ZAR16.05 opening the way for further upside moves.
Our range for the week is 15.70 – 16.10.
Have a great week ahead.