As we devour the last of our Valentines chocolates, we can rightly say that there is a “secret” admirer for EM currencies and more specific the Rand. We have seen the Rand punching through the R14.50 level currently trading at its best levels in a year. But taking a step back it’s easy to see that the country in itself has done nothing to justify the Rand in its recent run. A fact that was made quite evident by the President’s SONA speech last week.
There is nothing new to write about in the SONA speech. but one thing remains very clear: There are some daunting challenges ahead for the country. From a South African perspective, we suspect that these difficulties should start to impact the Rand and other areas of the markets, once a sense of normality returns to the markets.
Then again we have to ask the question, “What is normal these days?” and the new normal for the short term is the stimulus package from the US. With talks of the stimulus package doing the rounds, EM’s are charging ahead as a definite yield play would come into effect once the package’s size is announced. We have seen the US government is quite serious about passing this as President Trump’s impeachment trial was done without too many objections from the Democrats. This implies that the Democrats have bigger fish to fry and the stimulus package is right at the top of their list.
The US dollar has traded within its ranges for the larger part of the past couple of weeks. We have seen the currency dipping its toe below 1.2000 but has given up all of its gains and is currently above the 1.2120 level, back in the broader 1.20/1.2150 level. It all feels a little stagnant now, and a new bout of sentiment is needed for markets to shift substantially. One of the data sets released last week was the US CPI number which was disappointing and did little to the US dollar. However, we expect this number to gain popularity as soon as the latest stimulus package effect feeds through.
This week in the data cupboard, a few interesting data releases are all grouped together tomorrow. On the US side, we have the US FOMC minutes and US retail sales. Both these releases are going to be scrutinised by the market as the FOMC minutes will indicate the Fed’s thinking, and the retail sales will show the impact of COVID on the US consumer. The UK will release their GDP number and again the impact of COVID will be of importance.
As we get the word about vaccines being rolled out at a decent clip and fresh stimulus coming, we can envision the Rand’s scenario to push a little stronger along with other EM currencies. However, the one-way direction we have seen of late seems too far too quickly, and we could see the bungee cord snap back a little.