“While we think the dollar can stay fairly cheap for the rest of the year as the Fed raises the funds rate to 3.25/3.50%, the dollar’s stability at the highs could prompt renewed momentum. interest in this high yield emerging markets local currency bond space,” – ING Group


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The South African Rand climbed against most currencies in the G20 group during the first half of the week and could lead the GBP/ZAR to a one-month low with a break below the 20.0 handle in the coming days if the stalling dollar brings high yield. currencies are becoming fashionable again with investors.

The rand appeared to benefit on Wednesday when the dollar fell against most of its major counterparts amid mixed performance in risky assets like equities and commodities, which led the South African currency to rise. appreciate against around three-quarters of the G20 basket.

“The rand is currently trading around short-term technical support at 16.6000. A sustained and consolidated break below this level would signal a potential extension towards 16.3000,” says Walter de Wett, securities strategist at fixed income and foreign exchange at Nedbank.

“However, previous downside extensions have been met with buying interest for the dollar, and this will likely be the case again initially. Possible trading range for the rand today: 16,3500 to 16,8500,” said said de Wett on Wednesday.


Above: USD/ZAR displayed at daily intervals with Fibonacci retracements from June and late April indicating possible areas of technical support for the dollar and resistance for the rand. Click on the image for a closer inspection.


Rand gains preceded U.S. inflation data for July, which is likely to have a key influence on market perceptions of the Federal Reserve’s interest rate policy outlook for the rest of the year. year, with possible implications for the direction of the dollar in days and weeks. ahead.

Wednesday’s performance of the rand and dollar took USD/ZAR back close to lows hit last Monday when a fortnightly correction in U.S. exchange rates was halted by a flurry of economic data that threw water cold on the idea of ​​an impending recession in the US

GBP/ZAR also fell throughout this period and more than USD/ZAR, although both are likely to be sensitive to the outcome and implications of the US inflation figures, which could lead the Fed to get closer to the interest rate faster. projections he made in June.


Above: A week of G10 and G20 South African rand performance. Source: British Pound Live.


“Markets fear that a severe cycle of rising interest rates will persist this year and next. This caused a noticeable pullback from risk assets in Q2.22 and Q3.22, leading to dollar strength on safe-haven inflows and weakness in commodity and emerging market asset prices; and therefore the rand,” says Annabel Bishop, chief economist at Investec.

“High inflation continues to worry markets and the outlook for it to stay higher for longer than originally expected, which is being signaled by leading private, regulatory and multilateral sector research houses and departments. There is therefore a risk of even higher volatility (EM currency volatility is high compared to Q1.22) and risk of even greater rand weakness,” she added.

Rand gains have been sold and dollar declines bought in the 16.40 region in USD/ZAR over the past few weeks and there is a risk that this will be the case again if the data on the US inflation pushes the Fed toward a faster pace of monetary tightening and strengthens the US. bond yields.


Above: GBP/ZAR displayed at daily intervals with Fibonacci retracements from June and late April indicating possible areas of technical support for the British pound and resistance for the rand. Click on the image for a closer inspection.


Emerging markets aggregate local currency bond benchmarks are down around 8% year-to-date (better than equity benchmarks). However, this 8% drop masks regional differences. EM Latam (dominated by Brazil and Mexico) is up 2% YTD, while EMEA and Asia are down 23% and 6% respectively,” says Chris Turner, Head of Markets and Regional Head of Research for UK and Central and Eastern Europe at ING.

“While we think the dollar can stay fairly cheap for the rest of the year as the Fed raises the funds rate to 3.25/3.50%, the dollar’s stability at the highs could prompt renewed momentum. interest in this high yield emerging markets local currency bond space,” Turner and his colleagues said on Tuesday this week.

A faster Fed is far from assured, however, as the consensus suggests that US inflation likely stagnated last month and the dollar remained weak on Wednesday despite data released in the previous session showing that inflation costs employment increased by a double-digit percentage in the last quarter.

Unit labor cost data is widely regarded as a leading indicator of wage growth, which the Fed and other central banks see as important influences on the path of an inflation rate that hit 9.1% in the United States last month. last.

Fed policy has a significant influence on demand for the dollar as well as other currencies and assets, hence the importance of US data.