As we start the last week of July, the rand trading as a yo-yo is back in full force, after some rollercoaster trading in the previous week as well. It has been a tough month in many facets, with the Deta variant of Covid going around across the world, the local currency under pressure, with looting and infrastructure damage placing further strain on our fiscus. Initially, the rand slowly edged back toward the trading levels before the unrests and looting from the week before. However, the critical event for the rand was the MPC meeting last week, where it started to lose some ground against the US dollar and other EM peers.
The reasons vary on why the rand went on a slide after the MPC meeting where interest rates were kept unchanged. The one reason, which most commentators agree upon, is that the expectation of a rate hike later this year seems to have been swept off the table. The SARB’s quarterly projection model has been revised lower as their inflation expectations are well within the 3% to 6% band. The fact that growth is constrained and inflation under control only leads us to believe that a rate hike is still a little further off.
Looking at the interest rate swap curve below, one can see that the curve has moved slightly lower from the beginning of July until after the SARB announcement.
With the expectation that the SARB would hike in the coming months, the market was front running the expectation as yields were expected to rise. After the dovish MPC, the market revised its expectation lower, and this caused a sell-off in the rand. The worry now is that the market will start to look at the bare bones of the South African economy and look past the yields and the current account surplus, and we saw the rand trading weaker.
On the International front, there was very little in terms of data, with the main event being the ECB meeting last week. We saw the ECB diverging from the US Fed, with the ECB stating that QE will continue unabated as they’ll try and get their inflation number above 2%. The result is that the euro weakened against the US dollar, and we have seen the pair trade below 1.18. This will strain the rand as a bullish dollar is not good for Emerging Market currencies.
If we look at the week ahead, there are a couple of key events, specifically on the US dollar side, with the US Fed interest rate decision and press conference the highlight on Wednesday. The expectation is that the Fed will keep rates unchanged, but it will be interesting to see what tone the press conference takes as a hawkish Fed could see the US dollar surging. The other key US data print will be the US 2nd quarter growth rate released on Thursday. The consensus is for an 8.6% growth quarter on quarter.
We have seen the rand trading around the 200-day moving average, which is a crucial level for the rand. A relief rally is warranted with the rand and the US dollar trading in the one direction for a sustained period. However, the data and events of the week could push the rand to test the R15.00 level should things turn “risk-off”. All eyes will be on the Fed as some dovish comments can result in a bit of that relief rally. The graph below clearly shows the difference 7 weeks makes, the USDZAR trading 10% weaker up at R14.85 from R13.40 in early June.