It has been a long time coming that the Rand is trading in such tight ranges, almost as if the Rand is going into hibernation for the winter. If only, it was that simple and we could be warm in front of our fireplaces safely in the knowledge that the Rand will remain range bound for a while.
The Rand was close to testing the low against the US dollar for 2016 when it reached R14.15 in afternoon trade on Friday, as emerging markets are still on the front foot buoyed by the yield chasing of international investors.
The fear is that with the Rand stuck in tight ranges and struggling to break lower that the current momentum has run for a little too long. The very nature of market dynamics suggests that there is likely to be a pullback in the offing but with 2016 being the year where all normal market dynamics were thrown out the window one would not bet against the Rand continuing its rally and having another crack R14.1000 level.
While the coup in Turkey and Brexit kept us busy for the early part of last week, the latter part petered out into somewhat of a dire affair, with the ECB meeting going off without much of a hitch. In a pretty lacklustre press conference, Mario Draghi stated that the ECB will keep rates on hold and that they will only assess in the coming months what the effect of Brexit on the ECB will be and for now we must sit on our hands until the September meeting.
Back home our local MPC meeting continued much in the same vein as the European meeting with the MPC holding interest rates unchanged. The slightly worrying factor is the downward revision of growth for 2016 to 0%. It will not take a lot for growth to dip below 0% if there is another shock to our economy. It seems that the MPC is holding on to their inflation targeting framework and with the Rand comfortable in the past few months, no new inflation worries have been seen.
On Friday, Fitch introduced a new methodology regarding the way they calculate the local currency debt of countries and South Africa was one of the countries that were downgraded. The local currency debt is just one notch above investment grade and in line with the external debt rating of South Africa. Although this has been shrugged off mostly by the market we can be sure when credit agency whispers start to flare up later in the year the reaction will be swift and volatile.
Looking ahead to this week, we have two major meetings, first the FOMC meeting in the US and then the Bank of Japan meeting on Friday. Although no action is expected in the US, the market will keep an ear out if the Fed will turn more hawkish after robust US data in the past month and that we can see a hike in December. This could be Rand negative should the Fed change their tone on Wednesday and should the mood turn a little we could see the momentum halt for emerging markets.
The Bank of Japan will announce whether or not they will introduce more stimulus into the economy to start the Japanese economy up again. With further stimulus in developed countries, the stage is set for Rand gains should the BoJ play along. The stimulus is not a given so the end of the week could be interesting.
Apart from the BoJ meeting on Friday, there will be US GDP numbers as well as South African Trade data. The US data is expected to continue to show a robust economy which could add to dollar strength should the Fed come out hawkish. The South African Trade balance does not have the market moving capabilities it once had and should not cause any ructions unless the print is appalling.
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Andre Botha in conversation with eBizRadio’s Nick von Stein
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