South Africa's Weekly Market Outlook

The markets were hit by a dovish Federal Open Market Committee (FOMC) statement last week. US bond yields and the dollar tumbled off the back of the increased bets for rate cuts in 2024. The Federal Reserve (Fed) kept the federal funds rate unchanged at 5.50% but the real dovish sentiment started flying when the Fed announced that they would slow their balance sheet taper to $25 billion, down from $60 billion, per month. That is a whopping $35 billion that will technically be injected into the market.

The dovish FOMC meeting was followed by a weaker-than-expected ISM manufacturing PMI print along with a feeble non-farm payroll print of 175 thousand in April, down from 315 thousand in March. These data prints along with the recent weak US GDP results are increasing the odds for a Fed rate cut sooner rather than later as the Fed may be forced to stimulate the economy before they reach their lauded 2% inflation target. On top of all this, last week US regulators announced the first US bank failure of the year with Philadelphia-based Republic First Bank being forced to close its doors.

The week ahead will allow markets to digest the Fed’s more dovish stance as there are no major data prints on the calendar. The US 10-year and 30-year bond auctions will be the main attraction for the week ahead. We will be able to gauge whether investor appetite for long-term US debt has improved following the latest monetary developments. The recent demand for long-term US paper has been fragile with long tails forcing dealers to pick up the slack in the US bond market.

Locally, we only have the SA manufacturing production print for March to look forward to.

The first chart for the week is the Fed’s balance sheet as you can see the Fed has been able to taper their holdings of US treasuries from roughly $9 trillion to $7.3 trillion since 2022. They will however slow down their taper which will see the Fed selling fewer bonds to the market. The supply of bonds entering the market will thus decrease which could see the price increase and yields decrease, ceteris paribus.

The recent week’s US data and last week’s dovish FOMC statement have seen the DXY ease and the index has pulled back as we expected. The support level to watch now is the 50-day MA level of 104.54 and the 61.8% fibo retracement of 104.77. A failed break below this support range will allow the DXY to complete the 5-wave impulse on the chart will take the DXY to the 2023 high of 107.35. A break below the 200-day MA at 104.20 will invalidate this expected move higher.

Similarly, the US 10-year yield also pulled back last week given the increased odds for rate cuts. The critical support level to watch here is the 50-day MA at 4.38%, as a failed break below this yield will allow yields to spike to 5% off the back of a continued sell-off in US long-term paper despite the Fed’s efforts to aid the US bond market. Keep an eye on the tail in this week’s US 10-year note auction!

The risk on trade allowed equities to bounce off of their recent lows which saw the SPX test the 50-day MA resistance level of $5,130. A failed break above this resistance rate will allow the index to fall further onto the 38.2% fibo retracement level of $4,822.

The rand has surpassed my expectations recently and reminded me that the USDZAR pair tends to take the stairs up, and the elevator down. The risk-on swing last week allowed the rand to keep the pair below the 200-day MA resistance rate of 18.80 which saw the pair fall back onto the psychological rate of 18.50. The downside break out of the blue wedge thus invalidates my previous expectation for the pair to re-test level above 19.40. The next support rate for the pair is the 38.2% fibo retracement rate of 18.38 and a break below this level will allow the rand to pull the pair onto the yearly low of 18.24. Technically the 50-day MA is set to cross below the 200-day MA and the RSI has room to move lower before hitting oversold zones which is rand positive.

It is difficult to call the ZAR at the moment. A positive and peaceful local election result will see foreign investors return to the SA bond market which is rand positive coupled with a sustained dovish stance from the Fed. On the flip side, a sustained rise in the US 10-year treasury yields and the DXY could pull the pair higher back towards 19.00. The only missing piece is precious metal prices. The rand behaves like a commodity currency and another leg higher in precious metal prices will allow for a sustained rand rally towards 17.40. For now, I remain in a relatively neutral stance for the pair but I am favouring a test of 17.40 over a test of 19.40 at the moment given last week’s developments.


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