The mighty greenback managed to record gains for the eighth consecutive week last week which saw the DXY close the week at a six-month high of 105.34. The dollar was mainly boosted by the continued rise in the US 10-year bond yields, which touched a 16-year high of 4.42% last week, and the stronger-than-expected US CPI figures. Core US CPI figures for the month of August, month-on-month, rose by 0.3%, up from 0.2% while year-on-year US CPI figures came in at 3.7%, up from 3.2%.
Additionally, the US PPI figures for August also climbed to 0.7%, up from 0.4% month-on-month. Bear in mind that the US Federal Reserve is aiming to cool US inflation to 2% and last week’s stronger-than-expected CPI and PPI figures signaled to the markets that the Fed may have to keep rates higher for longer if they are to pull inflation down to their target rate. The other alternative for the Fed is to throw in the towel and lift the target inflation rate for their monetary policy. The European Central Bank (ECB) was in the interest rate hot seat last week but their 25-basis point interest rate hike from 4.25% to 4.50% did absolutely nothing to support the euro against the dominant dollar.
All eyes and attention will be on Wednesday evening’s Fed interest rate decision this week. We’ve already discussed how the Fed is struggling in its fight against inflation, but the US economy has been relatively resilient to the rate-hiking environment, on paper. The Fed is expected to keep rates at 5.50% but a surprise 25 basis points hike is not off the table. Market participants will however be more concerned about the Federal Open Market Committee’s (FOMC) statement and their view of the current hiking cycle.
An unchanged Fed interest rate decision may be the only thing that can put brakes on the dollar at this point. Locally, the SARB will be in the shadows of the Fed with our local interest rate decision which will be delivered on Thursday. The SARB is expected to leave interest rates unchanged at 8.25% but given the fact that the rand is on the ropes, another rate hike may be needed to support our battered currency. Additionally, local CPI figures for the month of August will also be released this week.
Kicking off the chart pack for this week is the US 10-year yield. The US 10-year yield hit rates last seen in 2007 last week and it seems as if the only thing that will tame the rise in yields is clear messaging from the Fed that the hiking cycle has reached the end of the road. Until then we could see US 10-year yields climb above 4.50%. When in doubt, zoom out…
Checking in on the DXY, the continued dollar appreciation is pushing the DXY closer to the yearly high of 105.94. Technically the DXY is trading near overbought zones and there is a degree of bearish divergence on the RSI indicator, which is dollar negative, but the dollar’s direction will be dictated by the Fed’s communication and the rising US yields. A pause in rates from the Fed could allow the overextended DXY to pull back and re-test the support level of 104.65. There is a clear upward trend, but a pullback is looking likely, markets don’t move in one direction.
Turning our attention to commodities, brent crude has gone on a strong bull run since July this year and last week’s gains were attributed to OPEC emphasizing global supply constraints and our target of $96 per barrel, the 38.2% Fibonacci retracement rate is now well within reach. Similarly, to the dollar, brent crude is trading in heavily overbought ranges and a pull back towards $92 or $88 per barrel may be on the cards before the bull run continues.
Saving the rand for last, unfortunately, I can’t say best for last. The rand managed to keep the USD/ZAR pair below the psychological handle of 19.00 last week but the low appetite for SA bonds and SA’s fragile fiscal position will limit any considerable rand appreciation over the short term. Technically, a failed break below last week’s low of 18.77 could allow the pair to climb and test the resistance rate of 19.53. Hopefully, other commodities, particularly platinum, can start rising off the back of the rising oil price which will support SA’s export earnings as well as the battered rand but until then the bias remains towards continued rand weakness.
