Choppy waters ahead beware

Choppy waters ahead beware

In the last week, we’ve seen markets come to terms with the bout of US treasury yield spikes, and EM currencies have slowly but surely clawed back some of the losses suffered. Will this narrative of EM’s slowly regaining some momentum hold this week? Perhaps not, as we think the week ahead could be very choppy.

We expect markets to trade sideways, and it will not be surprising if EM currencies continue to grind stronger against the US dollar until Wednesday this week, when the most significant risk item the US Fed meeting will take place. The statement from Fed Chair Jerome Powell will be of specific importance.

If we cast our minds back only a couple of weeks ago when Mr Powell addressed the markets and everybody expected that he would talk down the Treasury yields. Well, that did not happen, and EM markets and Gold sold off as investors moved into US Treasuries. Below we can see the run-up in US10Y treasury yields. What can we expect this week around?

There’s an underlying expectation that the US economy is set to rebound quite hard as the COVID pandemic is more under control in the US after its extensive vaccine rollout. An expansive rebound will put pressure on the Fed with its easy monetary policies. What will happen if they need to change course due to inflation and interest rates increases?

While nothing is expected to change immediately, it will be interesting to understand the path that the Fed is likely to take. The double-edged sword at the moment is that if the Fed keeps the status quo, it could move markets. If they change the wording of their statement, it will move markets. With the US economy seemingly turning the COVID corner, it could be a case of sooner rather than later for the FED to start to do something if the rebound is as sudden as markets are expecting. The focus will shift to what happens with CPI in the US, and as this number disappointed last week, it lead to a more risk-on environment that we see currently. So, US CPI and what happens to it in the future will be a crucial focus.

With the Fed dominating the headlines this week, most of the data cupboard will be glossed over. The biggest release before the FED meeting is the US retail sales that will be released today, and generally, this number will give us a clue as to whether the US consumer has turned a corner on their spending post-COVID. Retail sales will also give us some idea if inflation will pick up if it posts a good number.

The Rand has fought back from the R15.55 level against the US dollar back to R14.85 at the end of last week. The Rand is following the moves of its EM peers closely, and none of the data sets out of SA this week will affect the market. However, should the FED come out a little more hawkish than we expect concerning hiking interest rates earlier than expected, we could see the Rand and EM currencies fighting from the back foot as we head into the weekend.

At levels below R15.00, we suggest that importers should hedge any short-dated exposure as we believe that with the choppy nature of the market that could prevail after the FED meeting could see the Rand above the R15.00 level.