Last week began with a bang but ended with a little bit of a whimper when the FX market turned more sideways than volatile as the US geared itself for a long weekend. Some of the key takeaways from last week, especially looking at South Africa, is that the Rand is still susceptible to news of further lockdowns.
The Rand took a bit of a knock in the early part of last week as the market expected the Rand to slide on impending lockdown fears, which turned out to be a bit of “buy the rumour, sell the fact”. We have seen the Rand steadily clawing its way back toward the R15.10 level, but it seems to have settled around the R15.25 level.
Currently, in the market, we detect a bit of a strange phenomenon. The US dollar is on the front foot, but the US dollar move hasn’t caused a significant shift in the EM space with the Rand holding firm in the wake of the stronger dollar. The reason for this, we believe is that the market expects further stimulus from governments and central banks, which could induce an additional round of yield-seeking behaviour while glossing over some EM countries economic problems.
Which leads us to this week, and US dollar in focus due to the inauguration of Joe Biden as the 46th US President. It will be interesting to see how the event will play out with predictions of civil unrest to an uneventful affair. With so much uncertainty, the market will probably trade a little “risk-off” before the event as caution is perhaps the best strategy in that scenario. We have seen the US dollar break below the 1.21 level against the Euro, which only adds to our suspicion that the market is a little “risk-off” at the moment.
The COVID pandemic and the impact of renewed lockdowns are somewhat muted at the moment. Still, with new strains popping up everywhere and the vaccine rollout on the slow side it will not be out of the realm of possibility that volatility is just around the corner should uncertainty reach April 2020 levels.
Apart from the US inauguration, there is an ECB meeting this week as well and while we expect little in the way of interest rate or stimulus measures we expect ECB President Legarde to address the Euro exchange rate. In particular, a strong Euro will do little to raise inflation and keep interest rates lower for longer.
What does this mean for the Rand? Thus far the Rand has done quite well in the face of a stronger US dollar, but we believe that it could be a week of Rand weakness when looking at the risk-events happening this week and the current “risk off” sentiment. Should no shocks enter the market this week, there is scope for the Rand to claw back some of its recent losses and the Rand could be within reach of the R15.00 level, but the market will remain cautious at first which brings R15.50 into play.