For the better part of last week, we saw the markets trading sideways in anticipation of the speech by Fed Chair Jerome Powell at the virtual Jackson Hole symposium. It was no surprise to see the currency markets trading in very narrow ranges leading up to the speech.
We, however, saw the rand trading like a rollercoaster leading up to the speech, started the week off at R15.30 retracing back to below R15.00 just ahead of the speech. The expectation was that a dovish speech by Mr Powell could see the rand and other EM currencies rally as the US dollar will trade weaker. See below the USD/ZAR chart.
This was exactly the case as the Fed Chair stated that, while they are looking at starting tapering sooner rather than later, the tapering will be decoupled from any interest rate decisions. This means in broader terms that there is a separate set of conditions that need to be met before the time will be ripe for interest rate increases. We should also note that the tapering, when it happens, will be very measured and not as fast as the previous time where a taper tantrum ensued. Mr Powell also made it very clear that the only measurable they are using for the monetary policy will be the strength of the US economy, and any adverse conditions could shift the planned tapering out further.
Markets reacted as expected, with the US dollar losing some ground and breaking above the 1.18 level again against the euro. This caused EM currencies to seize the opportunity, breaking out lower and out of the narrow bands that it was trading in. The rand made a run at the R14.70 level, where it opened up on Monday. While there is still some momentum in the market, we have the US jobs number on Friday, which could either fuel the fire for emerging markets or put a quick halt to any momentum.
Speaking of which, the most important data point out this week is the US non-farm payroll number on Friday, with the expectation being for 650k jobs to have been added in August. The same rhetoric applies to the non-farm numbers as normal, with a miss on the bottom bad for the US dollar but a number above the consensus being good for the US dollar. Another important piece of data is the first reading of the EU inflation number on Tuesday. It will be interesting to see whether the data shows inflation above 2% where the ECB wants inflation before discussing taper or interest rate moves. COVID should still be kept in mind, as new lockdowns are only a few cases away, and it has the potential to stall economic recovery.
Locally, we expect the rand to continue to be on the front foot mostly after the shot on the arm that the Fed has given risk appetite, but gains can be harder to come by as we head into the back end of the week with the US non-farm data starting to weigh in the market. Importers must look to cover short term commitments around the lower R14.60 levels.