It has been a long time coming but we are finally here.? This week will see the start of the interest rate cutting cycle in the US with the FED set to put an end to the market’s continual guesswork around how big their cut will be on Wednesday night.? The great news is that locally we should also see interest rates come down this week!!!
These are the mid rates at 5:55 today:
Brent Crude = $71.63 per barrel?
- In true financial market fashion we are just days away from the eagerly awaited FED policy statement but still the bets are changing on how big their rate cut will be.? These shifting predictions were bad for the Dollar late last week and good for the Rand, this as we had weakened to R18.01 to the Dollar by Thursday only to see our exchange rate enjoy a cracking end to the week as we strengthened to R17.68.??
- 25bps or 50bps in rate cuts, this is the question that the market has been grappling with for weeks now and despite all the labour data, inflation data and FED speak we are still no closer to knowing which way the FED will go.? Last week was another classic example of how sentiment can flip-flop without warning, this as a well behaved monthly labour report with US unemployment dropping to 4.2% along with a better than expected CPI report at 2.5% had all but cemented prospects of a smaller 25bps cut.? Strong US economic data and the almost certainty of a smaller rate cut had pushed the Dollar Index up to 101.89 while the Rand took a direct hit as we fell to R18.02.
- It looked like guesswork around the FED’s rate cut was complete, and with just a 15% chance of a 50bps cut against a backdrop of strong US economic health that was music to the Dollar’s ears.? But then came comments from influential former FED member Bill Dudley on Friday where he said that the current US interest rate is 150 to 200bps higher than where it needs to be, and that he feels “there is a strong case for 50bps” in cuts this week.? Bets for a larger cut rocketed from 15% to 51% and in so doing knocking the Dollar Index right back to 100.90, and just when it looked like the Dollar was finding support in the final stretch before the FED we now find ourselves in a weak Dollar situation which has made life for the Rand much more enjoyable.??
- It has been widely noted that the FED has started previous rate cutting cycles with a larger 50bps move, but that was because those cycles were designed to tackle problems in weak economic environments which is not the case with the US economy this time around.? Bets might now stand at 51 to 49 in favour of a 50bps cut thanks to Dudley’s remarks, or a coin toss in a more accurate description, but there are a number of analysts reminding us that the FED is not prone to making dramatic moves when not needed to, and that a more orderly 25bps cut is actually the more likely outcome (Dollar positive).?
- The following is from Reuters and questions whether a 50bps can be justified:??The growing anticipation of steeper cuts helped boost stocks, gold and Treasury prices, and drive down the Dollar. But tepid inflation and other economic data earlier in the week suggest the FED may be willing to start slow as it cuts rates for the first time since 2020. "It's true that many rate-cutting cycles have indeed begun with a heftier chop, but typically against the backdrop of financial market stress.? With the S&P500 just 1% off its peak, and US household net worth at a record high, it's tough to point to financial stress," wrote Douglas Porter, chief economist for BMO Capital Markets.?
- The FED is all that the market will focus on for the next few days but we also have the Bank of England’s policy statement on Thursday, and more importantly, the SARB’s statement on the same day.? Local CPI fell from 5.1% in June to 4.6% in July, and if the forecasts are correct then on Wednesday we should see CPI for August coming in at the SARB’s mid-range target of 4.5% while guaranteeing that they will cut rates on Thursday.? Once again the question of how big this cut will be has been thrown about, and perhaps this will be determined by how big the FED’s cut is on Wednesday, but our economy desperately needs lower interest rates so any cut will be widely welcomed.? ?
- No local market data today.??
- Possible USD mid-rate trading ranges in the Rand today are R17.55 and R17.85.
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