South Africa's Weekly Market Outlook

Chips were aggressively pushed onto the table betting for two to three rate cuts from the Federal Reserve (Fed) this year following the soft US CPI print last week which allow risk asset to benefit from a weakened dollar. The US CPI for the month of April came in in-line with expectations at 3.4%, down from 3.5% in March, year-on-year which supports the notion that the Fed is winning the battle against inflation. The US PPI print, being overshadowed by the CPI release, however came in hotter than expected at 2.2% year-on-year.

The week ahead is quiet in terms of international data prints but locally the SA CPI for April will be released on Wednesday. The previous local CPI print came in at 5.3%, well above the SARB’s midpoint target of 4.5%. Another high local CPI print will force the SARB to maintain its hawkish higher for longer stance for the SA repo rate.

The first chart of the week is the Dollar index (DXY). The DXY tumbled off the back of the US CPI print which saw the index touch its 200-day MA support of 104.35. A failed break below 104.35 will however allow the DXY to maintain the current upward channel for a re-test of levels above 105. On the flip side, a break below 104.35 will allow the dollar bears to pull the DXY towards 103.18.

Similarly, the US 10-year yield failed to hold onto levels above 4.50% last week which allowed yields to slide onto the 200-day MA of 4.34%. The critical support to watch here is the 38.2% Fibo retracement of 4.35%. A break below this rate will see strong buying pressure pull yields lower towards 4.00%.

Looking over at the rand, the rand has been the best performing emerging market currency so far in the May. The pair has now firmly broken below the blue wedge and it is heading towards the psychological rate of 18.00. The pair is however trading in oversold zones according to the RSI indicator which indicates that a pullback in ZAR gains is likely over the near-term. The critical resistance rate to watch on this expected pullback sits at 18.50 where a failed break above this rate will allow the rand to pull the pair towards 17.41 as the year progresses.

Brent crude oil has tumbled since touching highs of $91.50 per barrel but it seems to have found support at $80.00 pb. Another leg higher towards $95.00 pb should not be ruled out at this stage which will put further upward pressure on commodities.


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