The markets were sent on a risk-on rally of erratic proportions last week after the US CPI print dropped by 0.5% in October to 3.2%, year-on-year. The softer than expected inflation print strengthened the argument that the Fed has now sufficiently tightened financial conditions and that their self-inflicted fight against inflation is entering its final rounds. The narrative that inflation has peak coupled with the expectations that the US will avoid an economic recession is pushing market participants to price in interest rate cuts which can come as soon as 2H2024. The risk-on rally saw the DXY tumble by just under 2%, the US 10-year yield fell by more than 20 basis while the S&P 500 gained a substantial 2.50%. The rand enthusiastically joined the risk-on rally which saw the rand gain appreciate a tad more than 2% against the broad based weaker dollar.
The international data calendar is quiet this week which will allow the waters to settle following turbulence form the past two weeks in the US. The Peoples Bank of China will however update their loan prime rate in the early hours of Monday morning and expectations are for the PBoC to keep their rates unchanged at 3.75%. The Chinese economy is still struggling to confidently lift its head after the current two year economic slump and given the recent weakness in the Chinese property market, the PBoC is forced to walk a tight rope regarding interest rates.
The local market is however bracing for the SARB’s latest interest rate decision on Thursday. The SARB will undoubtedly leave rates unchanged at 8.25% given the Fed’s recent decision pause and the fact that the limping SA economy will struggle to carry another 25 basis point rate hike. But before the SARB’s rate decision, the SA CPI results for the month of October will be released. The September CPI figure printed a 5.4% figure for inflation, well above the mid-point of the SARB’s 3-6% target.
Kicking off this week’s chart pack is our beloved rand. The local unit has put on a remarkable 6% recovery since the start of October, solely off the back of changes in international risk sentiment which has allowed the rand to attract carry trade attention. It is difficult to gauge where the rand will finish the year but it’ll undoubtedly be staring at a significant yearly depreciation off the January levels of 16.70. Any shift in investor risk sentiment will push the rand back onto the ropes but for now a steady recovery towards 17.92 seems likely if the rand can keep the pair below the 200-day MA rate of 18.60. Technically, there is a degree of divergence on the RSI indicator which is rand negative which has me expecting a re-test of that 200-day MA level.
Over to local equities, the JSE to 40 caught support off the 61.8% Fibonacci retracement level of R63,300 which has allowed the index to climb above the 50-day MA resistance rate. The RSI indicator still has room to move higher before hitting over bought zones so expect a test of levels above R70,000 if the rand can maintain some stability.
Shifting our attention to the greenback, the narrative is that the dollar has topped out and the break below the 38.2% Fibonacci retracement level at 104.40 deems as an early confirmation thereof. The DXY looks set to test the 200-day MA support level at 103.62 following the rejection on the 50-day MA level last week. The RSI indicator is however inching towards the oversold zone which will strengthen the 200-day MA level heading into the final stages of the year but a break below this support will see the DXY fall lower onto the 61.8% Fibonacci retracement rate of 102.57.
The S&P 500 has put on a face ripping rally after the Fed pause and cool US CI figures. The short squeeze has allowed the index to blast past the 50-day MA level of $4,340 and post gains of roughly 9% since the last week of October. The all-time high from January 2022 at $4,818 does not look too far off now…
