The markets were eventful last week and we have another humdinger lined up for the week ahead. The Federal Reserve (Fed) opted to keep the federal funds rate unchanged at 5.25%, as expected, but the sparks started flying during the FOMC press conference. Doves were let out of the box in the press conference with FOMC dot plot shows that the Fed will likely cut rates three times this year, the first of which will most likely be in June. The dollar fell after the dovish FOMC remarks however the dollar index climbed aggressively on Thursday and Friday off the back of an unexpected rate cut by the Swiss central bank, ECB speculation for a rate cut as well as a battered Japanese Yen that has not stopped tumbling since the BOJ’s most recent rate hike. Additionally, the Bank of England also opted to keep their rates unchanged at 5.50% last week.
Locally the rand was also on the ropes against the dollar despite the higher than expected SA CPI print for the month of February. The CPI figure for February came in at 5.6%, year-on-year, up from 5.3% which allowed the rand to gain at the start of the week but the broad based dollar strength prevailed in the second half of the week when South Africans were off celebrating Human rights day.
The week ahead will be a tremendously volatile one, not just because of Good Friday. The Fed’s preferred inflation metric, the Personal Consumption Expenditures (PCE), is expected to fall below the Fed’s 2% inflation to 1.8% in 4Q2023, down from 2.6%. A weak PCE print will undoubtedly spark even more bets for a rate cut sooner rather than later. Additionally, the 4Q2023 US GDP results are expected to show quarter-on-quarter growth of 3.2%. We’ve stressed this before, there is technically no reason for the Fed to cut rates; US stock indices are at all-time highs, financial conditions are looser than before the Fed started hiking rates in 2022, the US economy is still growing and inflation is still well above the Fed’s 2% target. The Fed will be forced to cut rates after a stress event in the market and also bear in mind that it is election year so the Fed will have to maintain the creditability of the current political regime in the US.
Locally, the SARB will announce their latest repo rate on Thursday and expectations are for the SARB to leave rates unchanged at 8.25%. The SARB will lag the Fed when it comes to rate cuts so South Africans should, on a best case scenario only expect rate cuts in the back-end of the year. The SARB will not cut rates until the Fed has started cutting rates.
The first chart of the week is the DXY. The DXY is currently testing the major red downward trend line. A break above this trend line will allow the index to re-test the 61.8% Fibo rate of 104.78. It is extremely difficult to call the FX markets now but the 50-day MA looks set to cross above the 200-day MA which will be a bullish golden cross indicator. I believe the dollar will continue to gain until the Fed starts cutting rates.
The rand strength has faded significantly since the pair failed to break below the February low of 18.53. The pair is now in a peculiar range between 18.98 and 18.68. I’m leaning towards a break above 18.98 which will allow the pair to re-test the red resistance range around the 19.20 handle. A failed break above 18.98 will however see the pair fall back onto the support at 18.68. Technically the cross of the 50-day MA above the 200-day MA is rand negative. For now, the pair is still stuck in the blue wedge we have been highlighting throughout the year. A top side break out of the wedge will see the rand tumble above the 19.50 handle and a break above 18.98 will an early indication for this move.
Brent crude has been surging since the start of the year and it is now testing the resistance level of $86 per barrel after breaking above the 50-day and 200-day MA’s. A failed break below $84 will allow crude to climb higher towards the September 2023 high of $96 per barrel. The Fed’s fight against inflation is essentially its fight against crude, and when the Fed starts cutting rates it will ultimately throw in the towel against its fight against crude which will spark a commodity Bull Run last experienced during the 1970’s.
Lastly, the S&P 500 continued to record more record highs last week but the RSI divergence is still present. A re-test of the 50-day MA should be imminent but standing in front of this liquidity driven stock market is like standing in front of a runaway freight train. The Fed will do everything they can to prop up the stock market leading up to the elections in November.
