A lot happened last week with some new risks in evidence that caused a little bit of a stutter in the rand market. The risk of the Evergrande default caused the initial rand sell-off as the contagion effect that the risk of the default will cause spread into commodity and equity markets, and we saw a broad sell-off across the board. Risky assets like the rand bore the brunt of it.
The week also included Central Bank interest rate decisions or Minutes from previous meetings. The US Fed minutes indicated that monetary tightening is on its way in the US. In his most specific discussion on tapering to date, Powell revealed on Wednesday that the US economy would probably be on a firm enough footing for the Fed to announce a reduction of the bond-buying programme at its next meeting in November. He also disclosed that the Federal Open Market Committee broadly supports a “gradual” taper, intending to withdraw the stimulus entirely around the second half of next year.
We have seen the US 10-year treasury yields rise to 1.5% after the taper announcement, which caused rand weakness.
The MPC kept interest rates unchanged on the South African front, but struck a hawkish tone with its comments after the announcement. The tone caused the rand to strengthen to the R14.55 level after the initial move to R14.75 level on the Fed tapering news a day earlier.
Renewed fears of an energy shortage in China have also rippled through the market, as the bigger supply shortage has started to have real world issues around the globe. The fear has led to oil prices rising to $80 per barrel, and we expect the price to stay elevated should the global constraints continue. This will place upward pressure on the rand, and as we know, any uncertainty brings unwanted focus on EM markets.
There is very little to write home about on the data front, which makes us believe that sentiment will drive the rand this week. All the factors mentioned above will play a part, with the US dollar being a significant driver with “risk-off” currently in the market. We believe that the rand will encounter some resistance at the R15.10 level, but a break of the R15.20 level will signal a break to the topside with the previous high of R15.40, its next target. The market did not expect this sudden rally and we will need to keep an eye on what happens to the dollar index to see if the dollar strength continues.
See below the USD/ZAR graph
We are currently testing the top of the previous channel, and we do not expect to break back into this channel.
Chart of the week
The chart of the week gives us an interesting scenario where Rand (Dark Blue) is starting to diverge from the other lines on the graph. The other lines are the Global confidence Index (Orange), SA Top 40 (Light Blue), and the JSE All Share (Grey). It is interesting to note that when global conditions are favourable, the stock market and the rand followed suit. This upswing in stock markets is usually due to a bull commodity cycle as commodity producers carry a big weight on the local front.
Generally, with a commodity upswing, we usually expect the rand to be on the front foot as the terms of trade in SA gets better. However, we have seen it diverge in the latest round of the commodity cycle, which makes us believe that the flow of excess US dollars has not been into EM. The question then becomes where the excess liquidity has gone and could send a shiver up the spine of EM currencies when the commodity cycle passes.
