We have said before that the “terms of trade” has helped the rand stay at suppressed levels in the short term. By terms of trade, we mean that the market is heavily skewed toward dollar supply and a lack of US dollar demand vs the ZAR. However, at the back end of last week, we heard some rumours that demand has slowly filtered back into the market, and we saw the rand weakening by 20 cents on Friday.
The question however remains: Is demand set to continue? This seems unlikely, and we expect demand to be very sporadic in light of the South African economy and its lacklustre performance. We have not seen the rebound in the South African economy that we have observed in other areas of the world. One only need to look at our trade balance to see the lack of demand and oversupply in the market.
This brings us nicely to an economy that is running red hot at the moment, and that is the US economy. The jury is still out whether inflation will be a serious concern in the US or will it be a transistor effect. In contrast, the FED continues to downplay the effect of sustained QE while the market is trying to call the FED’s bluff. We think this is the major reason why EM currencies have not reacted to higher US treasury yields picking up, as inflation is ordinarily bad for the US dollar.
What does the above mean for the market this week? We believe that the market will start the week off slowly as it makes sense of the developments in the rand on Friday and the tug-o-war between the Fed and the market regarding the US dollar. The sentiment is somewhat muted at the moment, and we could see some market direction with data releases coming up this week.
This week we have a jam-packed calendar that could move markets, with the major release being the US non-farm payroll number on Friday. We have seen the US data coming in better than expected in the past few weeks, with the GDP number last week confirming a bigger than expected rebound. This will make the US dollar more volatile in the future as there will be pressured from the inflation side, which could be dollar negative, as well as the economic data, which could be dollar positive.
After the move on Friday, we expect the rand to consolidate and drift around the R14.45 level, but with the amount of data floating about, we could see some volatility at the back end of the week.
USDZAR for the past month or so. The R14.45 level is sort of the mid-point for now.