Forex Daily Market - The ZAR settled near 14.1500/$

In today's market update, the ZAR ended last week with its third consecutive daily advance against the US dollar, taking its weekly gain to 1.45%.

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TODAY'S TALKING POINT

BER Consumer Confidence: Q2

Expected:

Prior: -9

 

Analysis: While consumer confidence at the start of the year showed signs of an ongoing recovery, it is unlikely that the recovery will have been sustained in Q2. The realisation that the economy’s recovery remains fragile with a slow vaccine rollout exposing South Africans to a third wave of infections, triggering fresh restrictions and a higher lockdown level will no doubt have dented sentiment. In addition to the above, constrained household finances amid fuel and electricity price increases and high unemployment are some of the factors that present downside risks to the Q2 sentiment reading. Subdued consumer sentiment will weigh on household consumption, which will detract from any prospects of a meaningful recovery in economic growth in the near term.

RAND UPDATE

The ZAR ended last week with its third consecutive daily advance against the US dollar, taking its weekly gain to 1.45%. The local unit strengthened to an intraday high of 14.0200/$, after beginning the day at the 14.2000/$-handle, as supportive risk appetite aided the emerging market basket of currencies at the end of the week. However, the ZAR settled near 14.1500/$ after encountering resistance at its 50-day moving average, suggesting a stronger catalyst is needed to break back below the 14.0000/$-handle.

 

Meanwhile, there were no surprises on the US inflation front at the end of the week as the Fed's preferred measure of inflation, core personal consumption expenditure (PCE), rose in line with expectations. Nevertheless, the PCE core index advanced 3.4% y/y, its largest gain since April 1992. While this hasn't broken the Fed's script that inflationary pressures will be temporary as economic activity normalises, the market will remain skittish over higher inflation prints, especially as they come alongside signs of a recovering US labour market, raising concerns of longer-term price pressures.

 

The week ahead heats up on the labour market front, with US private payrolls data and the official US jobs report for June likely to steal focus from an equally heavy domestic data week. For the Fed's employment targets to be met, there still needs to be several months of solid hiring before the central bank materially considers tightening policy, but that will unlikely limit the potential for kneejerk reactions and FX volatility in the week ahead.

BOND UPDATE

The week ahead will feature a host of economic data that will provide colour to the South African business cycle. Another core focus remains the new lockdown restrictions as the government attempts to control a rising level of infections with containment protocols. Reduced contact time, extended curfew, no alcohol sales and no gatherings for the next 14 days are some of the latest developments. This will further crimp the consumption cycle and raise uncertainty levels.

 

The major global data release of the week will be US-non-farm payrolls. Expectations for a solid recovery in the US labour market are supported by a successful vaccination rollout, the reopening economy, another massive fiscal stimulus package, with more to come. Although US inflation risks could rise, indications are that the Fed is unlikely to budge from its current ultra-accommodative policy stance until at least the latter part of 2022. The uneven nature of the economic recovery and considerable fragility in various parts of the US economy will be key concerns.

 

In terms of the SA data, there would need to be some significant upside surprises to the growth-relevant figures to unsettle the outlook for SARB rates. Barring a major sell off in the ZAR or significant upside pressure on oil prices, there is a limited reason for rates to be hiked higher than the QPM projections for 50bp of rate hikes by year-end, while SARB members have laid the groundwork for a hold on rates despite the projections.

 

Evidence of a weakening growth cycle, on the other hand, would increase the chances that rates remain on hold through to the end of the year. The deepening in lockdown regulations amid rising cases of coronavirus suggests that downside risks to the growth outlook are emerging.

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Research Team

Media, Sasfin Bank

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