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Dovish Fed, ZAR Weakening

Fed goes ‘Full-Dovish’

The one-two punch of St. Louis Fed Bullard and Chair Powell could have not been clearer. The Fed now has a dovish tilt. Yesterday Powell remarked that given the lack of inflation pressure emulating for the US economy, the Fed has the right and ability to target economic growth. The remarks sent global yields lower with Germans 10-yr govies yields hitting a new record low (-0.225%). Powell also specifically mentioned that central banks were prepared to respond to the risk generated by a global trade war. A shift in Fed rhetoric has done little to damage the USD as investors are preparing for a US equity market rally. Despite ‘this time is different’ discussions, the pattern of central bank stimulus inflating asset prices has been observed for over ten years. While USD relationship with TIIPS is well-known deviations occur when the Fed quickly changes direction, especially implying additional stimulus. Inflight of increase recession probability and weak inflation pressure, we anticipate that USD will remain in demand. Also, President Trump has a historical pattern of pushing issues to the breaking point only to pull them back from the brink. This suggests that markets should anticipate an ‘unexpected’ breakthrough on trade with China, Mexico, and Britain a “phenomenal” post-Brexit trade agreement. Markets will be watching for Feds Beige Book for further evidence of the weak economic condition, which could provide clues to the pace of Fed interest rate cuts. We remain constructive on USD despite marginal short-term weakness.

ZAR weakening as headwinds strengthens

The change in tone from the South African Reserve Bank is more than understandable. Although Cyril Ramaphosa emerged victorious from general elections, political, structural and growth uncertainties weigh on the South African economy and ultimately its currency, which is losing steam this week. The SARB is now signaling a rate cut for early 2020 to 6.50%.

The surprise came from SARB as it confirmed a rate hike for 2019 in its prior statement, while it adjusted its growth and inflation (headline + core) forecasts to 1% (prior: 1.30%) and 4.50% (prior: 4.80%). Yet in addition to the release of 1Q GDP figure, with quarter-on-quarter down 3.20% (prior: 1.40%), largely below expectations of -1.60% and lowest in 10 years, including flat year-on-year growth data (prior: 1.10%), further risks need to be considered. Restructuring of the heavily indebted energy department and current debates on Cabinet reshuffle, scope of SARB’s mandate should maintain the ZAR under pressure until positive resolutions emerge.

USD/ZAR is currently trading at 14.6830, approaching 14.80 short-term.

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