The frustrating Rand now
faces risks from the Fed
and the ECB.
We had two big event risks,
data risks, last week.
US GDP, Eurozone GDP.
Both of them came in
weaker than expected.
Nevertheless, the patterns
here are pretty clear.
The US economy, which was
doing so well in 2021, 2022,
is now certainly slowing.
Indeed, if you look at some of
the forecasts from the big
global banks, it's now expected
that the US could have negative
growth in the second quarter,
so maybe even entering
a mild recession.
Yes, Eurozone GDP growth was
also weaker than expected in
the first quarter, but the
Eurozone has avoided recession
and the data is pointing to an
ongoing economic pickup.
It's a little bit of a contrast
there that did generate some
moves in EUR/USD.
Nevertheless, the Rand just
remains frustrating,
stuck in ranges.
Indeed, if we just zoom out
a bit, look at a longer-term
picture there of USD/ZAR
and EUR/USD.
You can see since September,
October, massive Dollar
weakness, EUR/USD going
from $0.95 back to $1.10.
USD/ZAR remaining,
or continuing to
underperform significantly.
Indeed, if you look at
that chart, the last time
EUR/USD was at $1.10,
USD/ZAR was down at
the 16.00 level.
So massive Rand
underperformance.
You also see the Rand
underperformance if we
compare the Rand versus
the EM basket.
Not quite so significant,
but still where the EM basket
is trading is equivalent to
17.00 on USD/ZAR.
So Rand continues to have
a big premium.
Rand continues in ranges.
Rand struggles when there's
global risk off and when it's
global risk on.
Just does not really strengthen
as much as the
other currencies.
Now one reason for Rand
underperformance is the
weakness in the trade account.
On Friday, we got the March
trade balance came in
at R6/7 billion.
That's significantly lower than
the R18-20 billion that the
market had expected.
And also the February trade
balance was revised
down significantly.
So actually in the first quarter,
South Africa was running
a small trade deficit.
So imports bigger
than exports.
It's hard to understand exactly
what's going on here.
Trade data is very volatile,
so we can't clearly strip out
the effects of, is it the load
shedding on the export side
that's really affecting this or
is it just more broader trends
around commodities, etc?
Nevertheless, South Africa is
back to running small trade
deficits With South Africa
so unloved in the
investment community,
foreigners not putting their
cash in here, domestic investors
using that increased foreign
allowance to take money
offshore, you can just see
that the Rand really struggles
on a flows basis.
So Rand still rangebound,
but faces very high risks once
again in the coming week.
In fact, in the coming week,
we've got probably the biggest
concentration of event and
data risk of any single
week this year.
The two big ones are the Fed
and the ECB, but there's also
lots of other important data.
Non-farm payrolls out
on Friday, Eurozone CPI,
we get the ISM figures
out of the US.
To start with the Fed
and the ECB.
The Fed is widely expected to
hike 25 basis points and
that this is probably
their last hike.
So they're probably going
to say, they're probably
going to hike 25, say they're
data dependent.
If inflation continues to
surprise them, the upside,
they could hike again,
but broadly suggesting that
they've now reached the
peak in rates.
Very importantly, however,
they will almost certainly
emphasise that rates are
expected to remain high
for a long period of time.
In other words, not hinting at
any interest rate cuts through
this year, although the market
continues to think that at the
end of the day, they'll start
to cut before the year is out.
The ECB is a slightly more
contentious decision.
The market thinks that they're
going to hike 25, but there
is a risk that they could do
at 50 basis points.
And unlike the Fed, that is
now probably peaking, the
ECB will continue to signal
further rate hikes going forward.
Inflation in the Eurozone
remains a far bigger problem
arguably than it is in the US.
Now the decision whether to
hike 25 or 50 from the ECB may
come down to the Eurozone
inflation figure out earlier
in the week.
Story there is continued high
headline inflation around 7%
and core stuck at just under
6%, also very troubling.
Once again, contrast that to
the US where headline
inflation is at least coming
down rapidly.
Contrast an ECB that is still
hiking with the Fed that's
peaking and you see that
interest rate differentials
are moving against the US.
Now absolute level of rates,
the US is still higher than
the Eurozone, but if we just
look at the two year yield,
what you see is US two year
yield turning over, Eurozone
two year yield is basically
being flat, marginally upwards
over the past couple
of months.
So that gap between the US
and the Eurozone that was
so positive for the dollar,
is now slowly shrinking.
And if we then move over,
consider the gap between
the US and EU yield and you
compare it against EUR/USD,
it still seems that the pressure
is going to be higher
on EUR/USD.
In other words, ongoing
dollar weakness.
I've been arguing that the
dollar should weaken since
late last year and I've
been correct.
Where I haven't been correct,
though, is in saying this weak
dollar will feed through into
a stronger Rand.
Once again, this frustrating
Rand that's not reacting to
these global positives that
would normally suggest the
Rand is going to go stronger.
Still a lot of event risk
this week.
Fed, ECB.
Nonfarm payrolls
out on Friday.
Expected to show
a slight weakening,
continued slight weakening
in the labour market.
Nevertheless on the payrolls
front still very solid figures.
Numbers around 170 000
jobs having been created in
the month is the consensus
forecast.
Strength of the labour market
is something that's protecting
the US from going into
deep recession.
So even if we do have a
US recession, consensus view
is that it will be very mild
due to the strength.
Again, lots of other data in
the week and once again this
is the week with the biggest
concentration of event risk,
event and data risk of any
week this year.
There is a real possibility
that all this data and event
risk will finally generate a
USD/ZAR move out of its range.
For now though, the frustrating
Rand facing high risks but
very much rangebound.
Good luck for the week ahead.