What we know
Last week, global markets continued to navigate an increasingly entrenched inflation narrative, with geopolitical tensions showing no signs of easing in the near future.
The US Dollar Index (DXY) again showed signs of a flight to safety, climbing back above the 99 level as markets aggressively repriced global inflation risks and rising Treasury yields on the back of the growing possibility that the Federal Reserve may need to keep interest rates higher for longer, given the current economic climate.
For the South African Rand, this created a familiar but increasingly frustrating result -USD/ZAR closing 25 cents weaker than its weekly open. The local currency drifted weaker throughout much of the week as offshore investors once again reduced exposure to emerging market currencies amid rising oil prices and deteriorating global risk sentiment.
Oil, a familiar suspect, was impossible to ignore again as it has become the market’s reminder that inflation is not showing signs of retreating in the near future, and emerging markets are listening very carefully to these signals.
Brent crude surged back above the psychological $110 level following renewed geopolitical tensions in the Middle East and ongoing disruption concerns around the Strait of Hormuz. What becomes interesting now is no longer how high oil prices may go, but rather how sustainable the recent spike in oil prices becomes as time passes, given its merciless impact on the global economy as a whole.
For South Africa’s local economy, with few positive developments on the domestic front, this matters more than markets sometimes appreciate. The combination of lower commodity prices and sharply rising oil prices has quickly eroded future inflation expectations, trade balances, and broader emerging market risk appetite. What was initially expected to be a short-lived oil supply shock has now resulted in consecutive fuel price increases, none of which were priced into inflation expectations two months ago. And right now, oil appears set to continue winning that argument.
Gold itself also had a far more difficult week than many expected. Despite geopolitical uncertainty remaining at elevated levels, gold prices pulled back sharply as rising US Treasury yields and Dollar strength reduced demand for non-yielding assets.
That confidence, unsurprisingly, still appears limited as global markets continue to churn through new forms of developing news. Historically, when global markets become nervous about global inflationary pressures, that environment tends to favour the US Dollar as a safe-haven currency over emerging market currencies, which are undoubtedly seen to carry more idiosyncratic risk.
Unfortunately for the Rand, that is rarely a comfortable combination.
What others say
Moneyweb – Eskom zeroes in on offenders linked to load shedding procurement contracts
“Eskom says it is closing in on several employees accused of breaching procurement processes linked to a diesel procurement and storage contract that was key to keeping the lights on during the power utility’s darkest days.“
Reuters – Is the futures market getting ahead of itself on rate hikes?
“Bond market signals possible rate hike, but analysts have doubts.“
Good Things Guy – South Africans Raise Over R400,000 After Viral Cape Town Storm Video
“What started as a run through the rain has become one of the clearest reminders imaginable that kindness still has the power to change a life.“
What we think
This week’s focus will likely shift toward whether markets continue leaning into the “higher-for-longer” interest rate narrative that has become the talk of the town, or whether recent Dollar strength begins to fade after repricing somewhat aggressively over the past week.
The Rand’s weekly movements will depend on direction in the US Dollar Index, oil price elevation and the level of global risk appetite. Gold will also remain an important consideration. If gold stabilises after last week’s sell-off, commodity-linked currencies like the Rand may find some breathing room and energy to strengthen again. But if gold’s weakness continues alongside higher oil prices, emerging market currencies could face a far more difficult environment into June.
That said, the Rand’s resilience over recent months should not be ignored entirely. Despite increasingly volatile global conditions, the local currency has still remained materially below the “panic” levels which markets feared earlier this year, suggesting that material segments of the market still view South African yields as relatively attractive in a world desperately searching for meaningful risk-adjusted returns.
The Rand indeed finds itself in an interesting dynamic, currently appearing caught between competing forces of being viewed as an attractive carry trade, and a significantly stronger US Dollar driven by oil, Treasury yields and safe-haven demand. Whichever side wins that battle likely determines the next major move in USD/ZAR.
From a local perspective, markets will also continue watching SARB expectations closely, particularly as imported inflation risks begin creeping higher through elevated energy prices. If oil remains elevated for long enough, central banks globally may soon discover that inflation was never fully defeated — it was simply quietly disguising itself behind enough headlines to keep itself out of the limelight.
And markets, as always, are beginning to price in that possibility long before central banks officially admit it.
Our range for the week: R16.33 to R16.80.
Have a great week ahead.
