 Global Markets
The financial markets were significantly choppy this week, as a barrage of macro economic and sector specific data were released from all corners of the world. My opinion is that the market has become overly bombarded with 'data' to the extent that participants can not discern between relevant information and noise.
 Understandably, we are living and trading in uncertain times, with the sub prime woes and overall global growth contraction, looming over us. Graph 1 and Graph 2 (graphs provided by Bloomberg) serve as testimony to the volatility we have seen this week. Long or short, the volatility would have triggered a number of stops on trading positions. Thus going into the new week, the House view is dollar neutral. I expect the volatility we have seen this week to persist as we get closer to the end of the reporting season.
My focus, as far as identifying information from the 'barrage of data', remains on the following lagging and leading indicators: GDP, CPI, Employment Indicators (e.g. ADP Employment Change and Jobless claims in the US), Retail Sales, PMI (Manufacturing figures, e.g. NAPM and PMI), Consumer and Business Confidence, Trade figures, Bond Yields and Implied Volatilities on currency options.
By mixing these economic and market indicators, one can offset market sentiment against the logical analysis of economic fundamentals because quite frankly, some of the price movements never seem to make any sense, especially when one is not privy large currency flows.
We look forward to the FOMCs decision on the Fed Funds Rate on Tuesday the 5th of August, which is expected to remain unchanged at 2%. If the US bench mark rate remains unchanged, the USD is likely to face some weakness against the EUR and GBP as bets that the ECB will raise its bench mark rate, continue to increase.
However, despite the mounting pressure on the ECB, particularly to arrest inflation (which is at a 16 year high), the Eurozone economy continues to produce weaker data than the U.S. (hence my bias for a stronger USD in the medium to long term). Very little oomph is expected from the Asian currencies as these also battle against slowing growth and rising inflation.
Local Markets
Locally, the ZAR also had its fair share of action this week, continuing to defy economic fundamentals that would suggest a weaker currency or at least not at the levels we are currently witnessing. The milieu set by SA economic data this week seems to strengthen the argument for another interest rate hike by Governor Mboweni and his MPC. We saw a rise in private sector credit extension of about 54 basis points (bps), CPIX and PPI increased by 70 and 40 bps, respectively.
The anticipation of another rate hike, coupled with the market’s calculation of what the 'accurate' CPIX figure should be (after the statement by a local bank), has buoyed the ZARs carry trade appeal. A carry trade is an arbitrage trade where investors borrow money from countries with low interest rates (e.g. Japan – 0.5% and Switzerland – 2.75%), to invest in countries with assets that offer better interest returns (South Africa -12% and Turkey – 16.75%), earning the spread between the two. These investors (speculators is more like it) take on the risk that currency price moves will erase the profit earned from the interest differential.
When the carry opportunity diminishes or when the investor’s risk appetite wanes, they will sell the ZAR or TRY (Turkish Lira) denominated assets to repurchase safe-haven assets or completely close off their positions. For the month of July, the ZAR had the second best carry return (8.31%) against the USD, amongst all universal currencies.
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