After the hectic month that January was, we have seen February getting off to a very steady start with the Rand staying within the R14.80/R15.30 range and looking relatively comfortable in this range. The interesting part for the Rand and other EM’s is that it has shrugged off the US dollar movement for the most part. This, however, raises the question of how long will EM’s ignore the volatility in the US dollar before they start mirroring the Greenback.
There are two factors at the moment at play with the US dollar. The first is whether the US will pass the $ 1.9 trillion stimulus package (or some form of it). The supposed effect that it will have on the US’s economy in the future, whether it will accelerate inflation and overheat the economy. The second is the rate of vaccinations in the US versus the expected roll-out in the Eurozone.
This leads us to believe that some volatility is still in the US dollar in short to medium term. Should normal economics prevail, the expected stimulus package will be the cause of the US dollar to weaken. We have seen the market positioning itself for such a move, but a strange thing happened last week as we saw the US dollar fighting back to breach the 1.20 level.
The fight back was in response to the Eurozone’s expectation of lagging behind the US in administering the vaccine. The result will have a knock-on effect as economic recovery will also lag and build a nice base for the US to move stronger in the medium term. These economies will also be the first to start tightening monetary policy which would be bad news for the Euro in the longer term.
Last week, we saw the US non-farm payrolls with a weak print, suggesting that the US engine is taking longer to fire up again. The weak number caused the US dollar to slip a little, and we expect this see-saw to continue for the week. This week’s most significant data set out of the US is the US inflation number. We expect this number to increase in significance post any stimulus decision as this will be a clue to whether the economy is overheating.
The Rand has been moving in the R14.80/R15.30 range for the last couple of weeks largely unperturbed by the US dollar volatility. We all know that this is likely to change and EM’s can’t ignore the US dollar for too long. The same factors that are knocking on the Dollars door are also at play for the Rand.
There is most likely going to be a yield play should some form of stimulus run through the market, which will be EM positive. However, as soon as this run to yields dissipate each country’s response to the COVID crisis will be analysed by the market to assess the economy’s recovery. This could leave South Africa in the lurch, and the Rand could see some volatility in the back end of the year. That is the long term view, but for the week we expect the Rand to stay in its range as there is little in the data cupboard that could shift markets.