Last week we saw a shift in the Fed’s recent rhetoric – even though the Fed hiked rates by 75 basis points, the Fed stated that while they are approaching the neutral rate, hikes will now be done on a data-dependent scale. In the immediate aftermath of the slight change in the Fed’s rhetoric the US dollar weakened, which gave a much-needed shot in the arm to EM currencies, and the rand strengthened all the way back to the R16.40 level.
Another data set that came out last week was the Advance 2nd Quarter GDP, which showed the US economy had a negative growth quarter – the second quarter in a row where negative growth was seen. This immediately gave rise to the recession question which will be on the watch with every subsequent data release going forward. With the economy slowing down it will definitely start feeding into the Fed thinking and hikes could be less going forward should the impact remain significant.
One area where the growth slowdown in the US, Europe, and China has had an effect is the commodity sector. We have seen a rise in the Gold price instead of the US dollar after the fear of recession in the US and also the Oil price slowly tricking down with less demand expected for the commodity. Brent Crude Oil is below the $100 level and we could see the price struggling to reach the previous heights as demand falls away.
Now that the US economy is in focus again, we will see that focus will shift to any US economic data set in order to understand the state of the US economy. We will see other data apart from inflation drive the market and with this week’s non-farm payroll number we could see the first signs of the slowing economy in the employment sector. We can expect any adverse number on Friday will impact the US dollar and therefore the rand.
The rand will be a passenger this week with any move in the US dollar translating into some rand movement. We do expect the rand moves to be constrained a little due to the elevated commodity prices, and we do believe the rand is quite happy between the R16.50/80 range as it has failed quite a few times in breaking below R16.40. However, any move above R16.80 should be seen as a definite selling opportunity.