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USD retraces last week’s losses on the back of surging UST yields

January 19, 2022by Nicholas Kabaso
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Local Market Commentary

  • Copperbelt Energy has revealed that Zambia revoked its common carrier status. The designation, which permitted other energy producers to transport power on Copperbelt Energy’s lines at a fee, was revoked by the government on December 29. Recall the previous administration awarded Copperbelt Energy transmission lines the so-called common carrier status.
  • The industrial metals complex is keeping a close eye on developments out of China given expectations of further policy easing and economic support following yesterday’s interest rate cut by the PBOC. The Chinese economy suffered a number of setbacks last year including the Evergrande debt crisis and this coupled with the on-going Omicron scares and lockdowns necessitated government support in order to underpin sentiment at the start of 2022.
  • Iron Ore has led the gains this morning with futures in Singapore up over 3% at one point to more than $130/tonne. Copper and Nickel remain topside focused but gains are being capped by a strong dollar at the moment.
  • In the local FX market, a broader bearish bias remains entrenched on the Zambian Kwacha at present amid strong dollar demand outweighing supply.
  • U.S. building permits and housing starts will be released today and will be the only major release of any interest. The data is likely to nudge slightly off their recent highs in both cases but remain relatively elevated. The recovery in the housing market remains intact for now and will continue to contribute positively to household balance sheets as prices rise and activity in the sector remains buoyant enough for sale prices to reflect valuations.
  • Bank earnings came into the spotlight yesterday when Goldman Sachs missed market expectations in its earnings. It has now raised the prospect of other banks also performing poorly, and it has soured sentiment on Wall St. There are several factors at play, but more subdued trading conditions through Q4 appears to be the main culprit. That speaks to the Fed’s decision to turn conservative and begin the taper. Given the rate hikes expected after March, the trading environments for banks more broadly will become a little tougher.
  • Today, the U.S. and the U.K. will announce plans to kickstart formal talks on media tariffs. The talks aim to resolve a long-standing dispute over U.S. steel and aluminium tariffs. Britain joins Japan in its efforts to gain access to the U.S. American steel and aluminium markets, similar to the deal reached by the E.U. last October. The tariffs they seek to reverse were first imposed by former President Trump and prompted a tit-for-tat response.
  • The USD continued to retrace last week’s losses yesterday, with the trade-weighted dollar index back above the 95.5 mark by the time the closing bell rang. This recovery comes on the back of a surge in UST yields, pointing to market positioning for some very hawkish forward guidance at the Fed’s policy meeting next week. However, note that the USD has lost some of its momentum overnight, with consolidatory trade seen today as the market takes a breather to reassess just how much in the way of prospective Fed tightening is already priced in. Still, the broader trend for the USD remains to the topside, although it may need a new catalyst to provide fresh impetus leading into the Fed meeting.

Rand and International FX Commentary

  • Sentiment towards the USD has improved or rather, global growth sentiment has deteriorated and a rotation back towards the USD is now evident. Wall St, alongside other stock markets, are retreating again, and US Treasury yields continue to surge higher. Inflation remains a key buzzword internationally, and investors are positioning for central banks and the Fed, in particular, to remove monetary accommodation with conviction. Inflation holds the potential to derail the global economic recovery if it is left unchecked and the disposable income of households is severely crimped.
  • Add to that, indications from the WHO that Omicron will not be the last variant, and there is plenty of concerning news to detract from overall sentiment. Global Covid cases have surged as much as 20% in just the past week, and even though Omicron has proven to be less virulent, it has still dealt the global economy another hit. Mobility stats show that Omicron’s impact was significant. Whether that is a function of an overreaction from policymakers or the fear factor influencing consumer and business behaviour is less important. The point is that it will detract from the growth dynamic through Q1 2022 at a time when inflation is also taking hold.
  • The WHO clarified that a variant that spreads as rapidly as Omicron does also generates a higher probability of more variants to follow. Although Omicron appears to generate less severe illness, there is no guarantee that the next variant will do the same. The one positive aspect of Omicron is that it has generated a natural vaccine that covers many bases and will help lessen the ultimate impact of future variants, especially when combined with higher vaccine prevalence.
  • Therefore, now is not the time to turn despondent. However, it is clear there is still much uncertainty concerning the future, and the markets are now pricing that risk in. In SA’s case, some focus will also turn to the inflation data out later today, where an inflation reading of 5.7% is anticipated. Even if the inflation data surprises to the downside, it is unlikely to change market expectations of a rate hike later this month or the idea that there will be more through the year. In a world of rising bond yields, high inflation and elevated levels of uncertainty, SA will need to normalise its interest rate policy, if it is to lend any support to the ZAR this year. The commitment to doing so will go some way to shielding the ZAR from a major blow-off.

Nicholas Kabaso

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