A stronger dollar and worries about the Delta variant have started to weigh on emerging market currencies – resulting in a not-so-great week for the Rand. At the start of the week, the Rand began around the R14.30 level and ended the week firmly on the back foot, trading up to R14.70. This begs the question: why did the markets suddenly turn risk-off in the face of a pandemic that has been with us for the past 18 months already?
Part of the reason is that the US dollar is chugging along, backed by a hawkish tone from Fed members as well as US non-farm payroll numbers that exceeded expectations. Talk from Fed members last week reiterated the idea that, at least in the eyes of some of the members, the Fed could start normalising their monetary policy sooner rather than later. This means that they are expecting tapering and hiking of interest rates, which in turn is a positive for the greenback. Further, the fact that the US non-farm payroll numbers beat expectations (943,000 vs. 860,000) will only make the call louder from the hawk’s side of the bench.
As employment in the United States is starting to ramp up, it will indicate that in some way, shape, or form, the US economy is slowly beginning to open up again – making the US one of the first economies to reach that phase post the pandemic that has been gripping the headlines for almost 2 years, despite the fact that the Delta variant is currently doing the rounds worldwide.
With renewed threats of further and extended lockdowns throughout many countries across the globe, it seems that the US will be leading the charge of economies opening up, which will inevitably favour the US dollar. The threat that the Delta variant poses is also clear to see in the commodity space, with Brent Crude oil and WTI oil tumbling around 8% on the back of oil inventories falling less than expected. With more lockdowns looming in China, this will place a further dampener on the demand for oil.
Locally, during the shortened week we saw emerging markets generally losing some ground on Women’s Day, which saw the Rand trading in the R14.80’s Monday morning. With the South African markets now back in, we do believe that there will be some profit-taking at these levels, and the Rand could claw back some of these losses. However, we have the US CPI numbers out today, which could cause market action if the number exceeds the expectation of 5.4% printed year-on-year.
While the rest of the world is seemingly playing catch up to the US, it is easy to see why emerging markets have started to lose their shine. For now, we feel the Rand has done a lot of work and we could be in for a little correction. Should the inflation number loom large as we expect, a lot of attention could be focused on it. The graph below indicates how the USD/ZAR has weakened from the R14.25 level up to the current R14.80.