FOMC minutes: investors are left waiting for March meeting
The publication of the January FOMC minutes did not affect much the FX market in the absence of any significant news. Market participants were still trying to determine whether “further gradual increase” has to be interpreted in the sense of faster pace of rate hike or whether it will just mean that the Fed will continue on this path and at this pace for years to come. We believe that the latter is more likely, especially in the short-term, as there is no reason for the Fed to accelerate tightening. Inflation is under control. Moreover, in our opinion, it is risky to draw to many conclusions from those minutes as Jerome Powell took over as Fed Chair in the meantime. Indeed, the January FOMC meeting was done under Janet Yellen, and even though Powell will not fundamentally change the Fed thinking, one could expect some small adjustments.
Initially, the greenback had an acute reaction as it fell slightly against most of its peers. However, the mini sell-off was short-lived. This morning, in the absence of a clear driver the buck is performing unevenly. USD/JPY is down 0.40% to 107.30, EUR/USD stabilised at around 1.2280, while USD/CHF maintains a bullish momentum. Given the lack of global driver, investors will remain focus on the Fed and anything that could influence its tightening path. More specifically, the January’s PCE figures that will be released next week and the February’s CPI report, which will be publish on March 13th, will be scrutinized by investors as it could influence the outcome of the FOMC March meeting. We remain positive USD; however it seems that the market remains cautious regarding the buck and do not expect further upside.
South African inflation is under control
Since Cyril Ramaphosa took office as South African President last week, economic data and reform on VAT came out yesterday, in an attempt to shake South African investors, but in vain: South African JSE 40 gained 707 points, ending at 51’727 (+1.39% intraday) and heading for its historical highs along 54’000, supported by Financials (+18.72%), Real Estate (+17.26%), Consumer Staples (+4%) while Consumer Discretionary lagged behind (-5.16%). On forex side, the ZAR continues to gain strength, gaining ground against the USD and EUR, valued at 11.66 (-0.56%) and 14.33 (-1%) respectively.
Published data concerned January Consumer Price Index, given at 4.4% Y/Y and 0.30% M/M (in line with both consensus) against 4.70% and 0.50% for the previous month, confirming our stance that inflation remains under control and is decreasing at an accommodative pace. President Ramaphosa also confirmed an increase of current VAT by 1% (from 14% to 15%) in order to tackle growing debt and improve credit rating. The change in VAT rate is supposed to take immediate affect as of April 1st 2018, keeping in mind that the country owns one of the lowest rate among emerging markets (e.g. China: 17%, Russia: 18% – 10%, Brazil: 25% – 17% or India: 28% – 0%).
