The latest US CPI and PPI prints for the month of January were released last week with both prints coming in hotter than unexpected. The hot inflation figures from the US saw a spike in dollar demand but markets eased as the week progressed in anticipation for this week’s highly anticipated FOMC meeting minutes. For now markets remain in limbo after the Fed rate cut expectations were dealt a reality check earlier this month and markets are hoping for guidance from the FOMC minutes regarding the rate projections for the year. In addition to the high US inflation figures, the latest US retail sales for January contracted 0.8% y-o-y. The combination of high and persistent inflation and poor retail sales results from the US consumer driven economy may just be the first cracks to show an economy that’s suffocating in the current rate environment.

Locally, the SA budget speech is scheduled to take place on Wednesday with an SA economy that remains severely constrained, plagued by infrastructure challenges, lower commodity-driven revenue, overspending and under collecting, and high debt-to-GDP ratio serving as the backdrop. Bond investors are eagerly waiting for any clues as to how the SARB and National treasury would utilize the SARB’s Gold and Foreign Exchange Contingency Reserve Account (GFECRA) to alleviate some of the mounting fiscal pressures. The account now has a surplus of roughly R500 billion due to the significant rand depreciation over the past 25 years. This account sits on the liability side of the SARB’s balance sheet as an asset of government but how it would be utilized remains uncertain. The SARB can either sell the reserves to finance a GFECRA transfer to National treasury or they can monetize the account. There are many concerns as to how this transfer will be received by the markets since the SARB will effectively be used to purchase or pay off the government’s debt which can become a slippery slope that leads to severe currency depreciation and inflation, just ask countries such as Argentina and Zimbabwe.

Kicking-off the charts is the DXY. The dollar touched the red downward trend line and the 61.8% fibo resistance level last week following the hot US inflation figures but it dropped back to the red support range where it started the week. A failed break above 104.80 this week after the FOMC minutes will see the DXY to drop significantly back down between the 200-day and 50-day MA rates of 103.70 and 103.09, respectively. The RSI is hovering near over bought zones which is another sign for a loss of momentum for the dollar.

Over to the rand, it remains in a wedge pattern that is expected to break any week now. The main support levels are the 200-day and 50-day MA rates around 18.75 and to the topside the main resistance rate is at 19.20. It is a tough one to call at the moment and the week is filled with risky event such as the budget speech and the FOMC minutes. No calls this week unfortunately but keep an eye on the 61.8% fibo rate of 18.97. If the rand can hold the pair below this rate it will be able to test those MA’s at 18.75. A break above 18.97 will however be rand negative.

Closing out this week pack is brent crude oil. Crude manages a strong rise off of its 50day MA at $78.80 per barrel and the high US inflation print allow the commodity to inch higher towards the 2024 high of $83.57 per barrel. If the Fed is to win its fight against inflation it has to keep the price of crude oil suppressed.
Link: https://www.tradingview.com/x/shHQR3BC/


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