What we know
The past week reminded markets that while geopolitical headlines may dominate the news cycle and temporarily drive market movements, monetary policy expectations remain the primary driver of currency markets.
The South African Rand traded in a 32-cent range against the US dollar last week, as the local currency continued to find support from the previous week’s softer US employment data. Although the greenback found periods of support as investors weighed renewed geopolitical tensions in the Middle East, the Rand proved resilient yet again, with broader risk sentiment remaining constructive for emerging market currencies despite elevated global risk levels.
The US Dollar Index (DXY) spent much of the week consolidating just below the psychologically important 101 level, posting its tightest weekly range in nearly two months. Somewhat surprisingly, markets interpreted the latest Federal Reserve meeting minutes as “hawkish”, highlighting that policymakers remain vigilant on inflation but stopped short of signalling an imminent policy shift without further evidence of inflationary pressures in the US economy.
With US labour market momentum showing signs of moderation in the latest data release, investors now appear to be increasingly balancing inflation risks against the possibility of slower economic growth. A higher-for-longer stance would bode well for the greenback and would likely place emerging markets on the back foot.
Brent crude oil experienced another volatile week as developments in the Middle East continued to move in the wrong direction, pulling oil prices along with them. Prices initially surged on renewed concerns surrounding the closure of the Strait of Hormuz before retreating as the market tested the credibility of Trump’s threats. Despite this renewed uncertainty, the market has so far avoided pricing in a sustained supply shock, leaving Brent well below the highs seen during recent periods of conflict escalation.
Gold traded lower for much of the week as expectations around the US interest rate path reduced demand for the non-yielding precious metal. Although geopolitical tensions generally support safe-haven assets, the prospect of higher real interest rates in the US continues to provide a headwind for gold prices in the short to medium term.
What others say
Reuters – Dollar dips ahead of US inflation data, supported by rate outlook
“The dollar remained in ​sight of 13-month highs on Tuesday ahead of U.S. inflation data, which will come under extra scrutiny as Middle East ‌tensions boost oil prices, while Federal Reserve Chair Kevin Warsh delivers his first semiannual testimony to Congress.“
Moneyweb – Good governance comes before investment – SBG’s Goolam Ballim
“Africa has never enjoyed such economic reverence.“
Euro News – England quarter-final win leaves Norwegian adopting British Airways logo
“Norway’s low-cost carrier lost its cheeky wager with British Airways after the quarter-final loss, but celebrated England’s win with a new flash sale on Norwegian and England destinations.“
What we think
Last week we said, “Strong US economic data could easily reignite demand for the US dollar and place the local currency on the back foot.”
Markets appear to be entering a phase where economic data is once again taking centre stage after several months dominated by geopolitical headlines and online tweets.
The US labour market did show signs of cooling in the latest jobs report, but not yet to the extent that would force the Federal Reserve into an immediate change of course. As a result, the US dollar may remain supported in the near term, although its strong upward momentum has clearly moderated.
For the Rand, this creates a more balanced environment than we have seen in recent months. As always, however, the Rand remains highly sensitive to shifts in global risk appetite stemming from geopolitical conflict, the resultant impact on oil prices, and commodity prices more broadly.
The coming week will place significant emphasis on US inflation data. Should inflation surprise to the upside, markets may quickly revisit expectations of tighter monetary policy, potentially strengthening the dollar once again.
Conversely, another softer inflation print could reinforce expectations that US interest rates are approaching their peak, providing further support for risk assets and emerging market currencies.
Our range for the week: R16.30 to R16.67.
Have a great week ahead.
