The markets were served a fresh plate of volatility this week which helped the dollar extend its early-year gains. News of heightened conflict near the Red Sea between the US and Houthi rebels in Yemen is expected to put pressure on the supply chains running through the region which added additional spice to the volatility plate. A host of Fed mouthpieces waffled this week and their comments were contradictory to the dovish messaging the markets received in 4Q2023 which put risk assets on the back foot in the first half of the week but equities quickly rebounded during the remainder of this week’s trading which allowed the S&P 500 to close the week at a fresh all-time high.
In terms of data prints, it was a quiet week with the headlining data being the stronger than expected US retail sales which climbed 0.4% in December, and the lower than expected US initial jobless claims of 187 thousand. For now, the dynamic seems to be that stronger economic data exemplifies a resilient US economy that can maintain the current high rates of interest without falling into a recession which supports the view that the Fed can hold “rates for longer.”
In terms of local data, we finally have some strong economic results to write home about. SA mining production, which has been under severe pressure due to weak commodity prices and production difficulties throughout 2023, managed to climb 6.8% in November, up from 3.6% in October.
The week ahead has a host of interest rate decisions in-store or in the markets but the rest of the large central banks won’t jump the gun on the Fed to start cutting rates. China will update their loan prime rate which is currently at 3.45% while the Bank of Japan and the European Central Bank will update their interest rates. For South Africans, the SARB will also deliver their repo rate decision which currently sits at 8.25%. Again, don’t expect any cuts from the SARB before the Fed starts cutting their rates. In terms of data, the headlining data print for the week is the US GDP for 4Q2023 which is expected to come in at 1.8%, down from 4.9% in 3Q2023, year-on-year where a strong print is expected to be positive of the dollar.
Let’s start the week’s chart pack with equities following the S&P 500’s surge to new record highs. The index has put on a resounding 18% gain since the end of October 2023 after central banks started singing the tunes for rate cuts in 2024. Technically the index does look a bit over-extended at the moment given the divergence of the RSI indicator and I’m expecting a re-test of the 50-day MA soon which currently sits at $4,638.
Looking over the local equity landscape, the JSE top 40 has been under pressure since the new year, largely due to the weakness in the rand. The index however remains in an upward trend and if it maintains levels above R65,500 a move higher towards the 200-day MA at R69,500 could be on the cards. Technically the RSI is flirting with the oversold zone which is also bullish for the index, the rand just needs to come to the party now…
We’ll be keeping a hawk’s eye on crude oil given the ongoing conflict in the Middle East. At the moment, if crude holds above the 50-day MA level of $78.50, we could soon see a big move higher toward the 38.2% Fibo level of $93.37. The 200-day MA and 23.6% Fibo levels will however offer resistance to this move.
Over to the DXY, the dollar is currently dancing with the 200-day MA resistance rate of 103.46 after its strong start to the year. The dollar index is however nearing the overbought zone on the RSI but it still has room to move higher depending on the strength of the 200-day MA resistance. It will be a very interesting week given the interest rate decisions from the European Central Bank, the Bank of Japan and the Bank of Canada so expect a high degree of volatility for the greenback. Zooming out the dollar remains in a downtrend since September 2022.
Additionally, we’re also expecting big swings for the rand this week given the SARB’s interest rate decision on Thursday. The pair broke above the 200-day MA last week which saw it briefly touch levels above 19.00. A failed break above the red resistance range between 19.15 and 19.30 will be rand positive which could allow the rand to pull the pair back below 18.50. Zooming out you will notice that the pair is working into a wedge, illustrated by the blue trend lines, and in which direction the wedge breaks remains to be seen.
