Forex Daily Market - US consumer sentiment has gradually improved

In today market update, the US consumer sentiment has gradually improved in recent months, reflected in the US Michigan consumer confidence index rising from 80.7 to 85.5 between December and June.

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TODAY'S TALKING POINTS

 

US Michigan consumer confidence: Jul P

Expected: 86.5

Prior: 85.5

 

Analysis: US consumer sentiment has gradually improved in recent months, reflected in the US Michigan consumer confidence index rising from 80.7 to 85.5 between December and June. This uptrend is expected to persist in the coming months, as the economy’s reopening continues and the tidal wave of monetary and fiscal stimulus filters through into the real economy. That being said, sentiment remains well below pre-pandemic levels, and there is still plenty of uncertainty over the labour market’s recovery and the duration of prevailing inflation pressures. Nevertheless, the US economic recovery will likely continue in the months ahead, in no small part due to improving consumption dynamics.

RAND UPDATE

The longer-term implications on the currency from the past week’s developments point to a downwards bias while muddying near term dynamics. The ZAR could still gain on the back of a weaker dollar once risk aversion subsides and sentiment improves. This week the US dollar has stretched to a three-and-a-half-month trade-weighted high, having risen roughly 3.30% from May lows. Should the market begin to see an imminent correction for the dollar, given the Fed’s continued rhetoric that tapering is still some way off and the number of US fiscal easing over the past year, the ZAR could capitalise on this while still taking favour from supportive trade dynamics.

 

Realistically, with supply chain disruptions potentially impacting exports and another hit to the country’s productive capacity and output from the riots, risks are balanced to the downside for the ZAR. With the currency’s nature as a higher beta asset being realised over the past week, the market will likely struggle to move the unit back to June lows around 13.5000/$. Additionally, COVID-19 risks remain rife as vaccination programs have been disrupted and we are likely to see a surge in infections following the riots and looting sprees.

 

As the week comes to a close, the ZAR sits at the bottom of the emerging market currency pile, 2.3% down from last week’s close. This past week has also seen the local currency slip from the top spot of currency performers against the USD on a year-to-date basis, with the Brazilian Real claiming the prize after its own stellar week.

BOND UPDATE

In response to concerns about inflation and a rise in yields, Fed Chairman Powell told Senators that US bond yields had dipped a little. Fed guidance, in general, continues to push back against the concern that there could be Fed hikes any time soon, at least until the US labour market shows signs of general rather than partial recovery. With new COVID regulations generally resulting in what many have called a k-shaped recovery, there is reason to think this narrative could persist for some time still, although many will be concerned about the potential that inflation pressures get out of control beyond the base effects currently raising prices.

 

Gold prices have trended a little bit higher in response to the expectations for low rates and soft dollar dynamics, while many currency pairs have gotten a boost since. The ZAR has equally been supported, recovering a bit on the week, with its commodity link shining through in a time of low domestic consumptive demand. For now, the Fed has given little reason to hike rates, while high commodities and soft domestic demand seem to be all culminating in a relatively stable ZAR.

 

We should reiterate that when violence and looting are a major concern for many business owners, there is still potential for a bear run across SA asset prices. Particularly in the months ahead as the second-round effects to government tax intake and spending numbers is seen. This will only really be visible into the end of Q3 when the knock-on effects of July and August's Covid restrictions and the effects of the riots detract from consumptive demand. Until then, a high degree of market uncertainty is likely to remain in place.

 

This generally feeds into the SARB holding rates flat next week, as is unilaterally expected when looking at Bloomberg consensus estimates. All six forecasts on Bloomberg suggest as much. The SARB has ultimately offered some hawkish forward guidance through its own Quarterly Projection Model that suggests rate hikes could be forthcoming to the tune of 50bp by year-end and around 100bp by the end of 2022. FRA rates have also been paid quite vastly higher beyond this, which speaks to the uncertainty under which the market is operating at present.

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