At the much-anticipated FOMC meeting last week, Fed Chair Jerome Powell struck more of a dovish tone than the market anticipated. Some of the key takeaways were that the Fed would not hike rates or start tapering their bond-buying programme in the near future. Mr Powell stated that the US economy is still a good deal away from making “substantial further progress” toward the Fed’s dual mandates of stable prices and maximum employment. He also stated that the Fed wasn’t worried about the spread of the delta variant in the US in the longer run.
After this announcement, we saw a slight bounce back in “risky” assets after a few weeks where risky assets like the rand were under increased pressure. The press conference also halted the US dollar from the low 1.17’s against the euro to above 1.1850 at the end of the week. The US 10y Treasury yields did not really respond to the dovish tone of the Fed; however, the 10y yield lost some ground at the start of this week to trade back at 1.17% from 1.31%. The dovish tone of the Fed brought the rand back from the near R15.00 level against the US dollar to trade around the R14.60 level. The rand made further headway yesterday to trade to the low R14.40’s.
The current environment lends itself to some EM strength as a dovish Fed, and excess liquidity typically leads to a hunt for yield. Yield is one of the shining lights in the South African space, and should there be follow through on the yield trade, we might see the rand slowly but surely claw back some of its losses. However, we’ve seen the reverse repo market hit a billion dollars in the latter part of last week, draining excess liquidity, and it could halt the rand a little this week.
On the first Friday of every month, we have the US non-farm payroll number. The expectation is for 900k jobs created in July, and a miss of this number, on the low side, will play into the cautionary narrative that was painted by the Fed last week due to the effects of the Delta strain of Covid on job growth.
We expect the rand to trade with less volatility, at least for the first part of this week, as we await the US non-farm payroll number on Friday. In the graph below, we see that the currency is stuck between the 100 days (R14.31) and 200 days (R14.74) moving averages, and we feel that we will need to break one of these levels for further impetus. The US non-farm payroll number might well be that impetus. For now, importers can use the better levels to take some short term cover, and if we see any levels closer to R14.70, it will be an opportunity for exporters.