Last week was much more eventful in the political sphere than the markets and currencies sphere. President Joe Biden’s inauguration was uneventful with the expected backlash the media was touting not materialising. With a relatively smooth transition of power in the US we could see a move in risk sentiment back to “risk-on.”
With the ceremony out of the way, we need to look at what the Biden Presidency holds for markets in the short term. The number one agenda item on most markets lips is the stimulus package that President Biden has proposed. It seems that the short term could be ripe for riskier assets as the stimulus package will most likely be pushed through Congress. There will be excess funds looking for a home and EM’s provide some yield, which will make the EM route attractive.
Another shot in the arm of riskier assets would be the likelihood that the global rollout of the COVID vaccine could boost economic growth as we head into the middle part of the year. The most likely scenario to sketch it that overall, it should be “risk-on” in the short term.
Before we call this case closed, we have seen enough in the last year to know that things are not as simple as outlined above. There are some caveats to how the US will fund the stimulus package either through tax hikes or more bond-buying. Hiking taxes will have a negative short-term impact on the US economy but will boost the US dollar while more bond-buying will have the opposite effect.
In terms of the COVID pandemic, we see new strains popping up worldwide, which could see further waves of the pandemic and should the vaccines prove ineffective further lockdowns could be possible.
Looking at the week ahead, the most crucial driver at the moment in the market is the US dollar, and if the dollar will lose more ground with a Biden presidency. It is easy to see where the market thinks the US dollar is heading when looking at the Dollar index graph below, trending weaker since March 2020.
Interestingly, the ECB left out the sentence of continuing to monitor the exchange rate out of their official statement. Are we seeing the ECB accepting the fact that the Euro is set to appreciate against the US dollar?
This week’s key data to of the US that could turn the focus back onto economics will be the Fed interest rate decision and the subsequent Press Conference on Wednesday and Personal Income Spending on Friday. The markets will keep an ear to the ground to any change to the Fed’s tone of their statement.
On the South African side, we saw the MPC keeping the interest rate unchanged with the expectation of the next move being higher. We have seen the Rand lose a bit of steam towards the latter part of last week with concerns over the world’s rising COVID cases. For the moment, local issues are being glossed over, due to factors being skewed to EM’s but South Africa could decouple from other EM’s should the country go into a third wave and fail to procure vaccine speedily. With bare state coffers, more attention will be given during the budget speech in February on the vaccine program’s funding. We expect the Rand to hold the EM narrative in the short term, but there are enough potential bumps in the road that we could decouple from the EM basket if there is a hiccup somewhere.
There are arguments for both “risk-on” or “risk-off” currently, and we expect that this could lead to some volatility in the short term. We will be buyers of US dollar with any break below R15.0000. See below the current USDZAR graph.