In the past couple of weeks, we’ve learned a couple of truths about currencies and markets in a pandemic, and that is that:
1) Pre held beliefs about currency movements and what influences the markets have been shattered
2) Despite Central Banks pumping liquidity into the market, Gold is still the best bet in a time of crisis. (However, the Gold market is trading like an EM currency in crisis times)
3) The US dollar is not the safe haven we expected it to be
So, let’s discuss some of the above points: Gold rallied hard to new record highs in the last couple of weeks. Granted we’ve seen the yellow metal fall like a stone towards the end of last week, but Gold is still at an elevated level. These elevated levels are holding despite most world economies slowly opening up in the wake of the COVID-19 crisis.
Gold price for the last six months
In Rand terms, we would have expected the Rand to rally on the back of the strength of the Gold price, as the Rand is generally regarded as a commodity currency. However, judging by the movement in the two assets that ship has clearly sailed.
Decoupling of Gold and Rand
The history of central bank stimulus packages looking for yield and in return, being EM currency positive has also not held water. Even though yield is relatively scarce at the moment, and some EM currencies providing some yield, we haven’t seen any EM moves. Maybe there is more to the US dollar weakness than meets the eye. Delving a little deeper, one concludes that the US dollar is weaker due to political issues in the US, mixed US data, a retreat in US treasury yields and ease of tensions in US-China relations.
Current US 10 year Treasury yields
An interesting note on this is the market data in particular, where optimism about the upbeat US data on inflation, jobless claims were slammed down by weaker than expected retail data. This shows that economic recovery could take longer than initially thought. This coupled with the overarching shadow of COVID is enough for market players to remain sceptical and hold off on taking too much risk. It naturally follows that the Rand could be on the back foot in the short term.
Now that we know why the markets are a bit loopy, we can focus on the data and events of this week that could force some Rand direction. Addressing the elephant in the room, it would be amiss if we didn’t discuss the latest COVID news.
News of a vaccine in Russia has done little in the way of curbing market scepticism that a vaccine has been found. Still, news of virus spikes dominates the market and will continue to weigh on market sentiment, and we can expect volatile markets as we continue to ride the COVID wave.
On the data front, it will be a rather quiet week with the most important data the release of the US Fed minutes on Wednesday. From the minutes, the market will get an in-depth view of the Fed’s thinking on how to handle the pandemic. It will take a couple of new revelations to cause markets to rally hard.
We expect the current notion of “risk-off” to continue with the Rand still trading in the R17.30 – R17.70 range with a catalyst needed for the currency to move out of the range.