What we know
The Rand has started the week on the back foot, trading around R16.25/USD as a stronger US dollar, surging oil prices and global interest rate pressures weigh on emerging-market currencies.
Although US inflation figures came out largely in line with expectations last week, the data release has seemingly provided markets with sufficient evidence to shift their expectations towards a 25-basis-point Fed hike this week.
Oil has simultaneously returned as a major market driver as the commodity gained close to 8% last week, settling just below $105/barrel by the close of the final session, as disruptions to Middle Eastern supply and shipping routes again tightened an already nervous energy market. It has since pushed back towards $110/barrel during the early hours of today’s trading session.
Gold, on the other hand, briefly recovered above $4,360/oz on Friday but still closed lower for the third consecutive week. Higher interest-rate expectations in the US remain a key headwind for the precious metal, with confirmation of the Fed’s interest rate decision to follow on Wednesday this week.
What others say
Daily Maverick – We’re still standing – SA’s GDP contracted, but this does not a recession make
“It’s easy to feel despondent on the news of 0.2% quarter-on-quarter GDP contraction, but then you miss the 1.4% growth woods for the half-year-one-on-half-year-one trees.“
What we think
Last week we mentioned that “the Dollar remained subdued in the last session of the week.”
This week, the tables have turned as the Rand finds itself in a vulnerable spot and is currently at the mercy of a stronger Dollar and significantly higher oil prices that will undoubtedly heighten global inflation concerns even further.
The ripple effects on the local economy are yet to filter through to economic data releases, however the catalysts for further Rand strength appear to be quickly dissipating.
This makes Wednesday’s Federal Reserve decision the key event for the week ahead. A 25bp hike is becoming increasingly priced in by market players, evident by a rising USD Index.
For USD/ZAR, the immediate environment therefore remains volatile. A hawkish Fed combined with elevated oil prices is not a good combination for the local currency and could easily keep the Rand under pressure, while any softer-than-expected guidance could offer some breathing room.
Our range for the week: R16.05 – R16.50.
Have a great week ahead.
