By Neels Heyneke, Macro Strategist and Andre Botha, Senior Dealer
After the rand weakness of last week, the rand clawed back some ground against the US dollar and traded closer to emerging market peers. The rand bumped its head against the R15.50 level again and has fought back to below the R15.00 level as we head into the MTBS (Medium Term Budget Speech) this week.
Has there been some shift in the rand or world that has caused the sentiment to turn in favour of EM’s? Well, a few stars aligned in the past couple of days that has helped the rand and other EMs along.
Chief among those is that the Fed has been a bit more dovish than the market expected. They have announced tapering but were not as clear as to when they will start looking at raising interest rates. The Fed also stressed that it would be watching carefully to ensure the economy is evolving in line with the central bank’s expectations, and will not hesitate to use its tools if necessary. This statement has left a hawkish door open for the Fed to weave in and out of Monetary Policies.
Another factor is that the rand was stretched a lot more than any other EM currency. With the bungee cord being stretched as far, it was expected that the rand could have a decent run once the sentiment stabilised again. As usual, the rand outperforms the rest of its EM peers in either direction, and this was case in point again in the last couple of weeks.
The US non-farm payroll numbers, which surprised to the top side, had the opposite effect of what we normally expect with better-than-expected non-farm numbers. We saw the rand and other EM currencies rally against the US dollar after the number, which suggests that the market saw the number as positive in a global sense. It could indicate that a jump in the US economy may perhaps trickle down into the world economy and the dip that we saw in the last couple of months was temporary in nature.
Looking ahead to this week, we expect the market to trade more or less sideways, as there is little in the way in the form of data that could really move the market. The US will be out of the market on Thursday with the US celebrating Veterans Day, and this could lead to low levels of liquidity going into the weekend and we can expect a few market players to take a long weekend in the US market.
However, in the rand space, we have the MTBS on Thursday, and by all accounts, this speech could be better than initially expected. This will be due to better-than-expected current account balances and less debt being taken on by the government, as has been shown by the bond issuances. A better overall economic picture could lead the market to turn their sentiment slightly to the positive side on South Africa and we could see the rand on the front foot after the speech.
Charts of the week:
We normally look at the US dollar for direction in the market, and what we can see from the above is that the US dollar is stuck firmly within the 1.1525/1.1623 range. We are approaching the top side of this range with the US dollar currently trading at 1.1600 but can encounter stiff resistance at this level. With the data cupboard being empty we expect the level to hold, but in order for us to change our view on the US dollar, the pair needs to break above 1.1667. What does this mean for the rand?
With all this being equal and no MTBS this week we would have said based solely on resistance levels that the rand could be running out of steam around the R14.85 level. This level would only break significantly lower should we have a weaker US dollar as explained above. However, positive sentiment from the MTBS could drive the rand lower, but we expect some hard yards between R14,70 and R14.85 which should be the levels that importers target to buy US dollars again.