The rand traded in a very narrow 20 cents range for most of last week in what could only be described as a lacklustre week. We feel a big emphasis was placed on the US Fed minutes released on Wednesday, and when that turned into a ” Deja vu” moment, the market hardly reacted to the number.
The Fed struck with more of a dovish tone regarding possible tapering and rate hikes, and US treasury yields lost some steam. We saw the US 10Y Treasury yield dip to 1.25% before recovering slightly. See the graph below.
The dip, in turn, has caused the US dollar to lose ground towards the back end of the week, and EM currencies like the rand were on the front foot going into the weekend, with the rand testing the R14.20 level on Friday.
This week all eyes will be on Tuesday with the much anticipated release of the US CPI number. Market expectations are for the number to print at 4.9%, still a very “hot” print for inflation in the US. Should this number continue to stay elevated, it will be in direct contrast to the Fed’s notion that the current spike in inflation is transitory. Expect that there will be some movement in the market upon the release of the number.
We can expect a knee-jerk reaction from the market in line with the previous release of inflation numbers, but as we have seen in the past couple of months, the significant moves in trend have been when the Fed gets involved and not from data releases. Another important data release is the US retail numbers on Friday. The number should indicate where the US consumers are finding themselves as the US comes out of the pandemic.
On the rand front, we expect the rand to drift sideways until the release of the CPI figures, where a little more volatility is expected. It will be interesting to note whether the market still believe the cautious approach of the Fed after the release of the CPI number, which also plays a role in the direction of the rand. As we saw towards the end of last week, with Treasury Yields falling, the market is slightly “risk-on”, and with no surprises from the CPI number, we could see the Rand edge a little firmer.
With this said, as one can see from the graph below, the R14.50 level will remain pivotal, and for now, we believe a break above this level will be hard, but a sustainable close above this level will open up the USDZAR to new ranges. For now, we expect the USDZAR to remain within the R14.00 to R14.50 range.