In the markets: What to watch this week

The dollar dominates as it acts as a bellwether for most markets. The Federal Open Market Committee Meeting Minutes acted as the shepherd for the dollar’s strength as it provided forward guidance for the next rate hike likely to occur in December at around 50%, according to Federal Funds Futures.

The rand gained 17% since May, moving from R15.97 to R13.20 last week.

Machinery and transportation equipment make up more than a third of the value of our country’s imports while other major imports include chemicals, manufactured goods and petroleum.

Mining only accounts for 3% of GDP compared to 14% in the 1980s. Our biggest exports are corn, diamonds, fruit, sugar, wool and gold as well as metals and minerals.

Wednesday’s inflation data is likely to show an improvement on the back of the stronger rand as the prices of our import-reliant economy decrease. The prices of imported goods decrease, in rand terms, as the rand strengthens.

The inflation rate has cooled since March but it heated up more than expected in June.

An important yet widely disregarded factor that is effecting the inflation rate is the effect that the drought has on the farmers and the supply of food to our country’s population.

End October is usually when the summer rains bring relief to the South African farmers after a cold and dry winter. Last year the rains didn’t come as the El Niño Southern Oscillation, associated with a cycle of warm and cold temperatures, shifted weather patterns, leaving South Africa with minimal rain.

It has been the worst drought in 35 years and over 40% of farmers have their backs against the wall. If the rains do not come in full force in October we may see further increases in the inflation rate.

In other parts of the global economy that affect South Africa, the US is watching the growth of home sales as an indication of whether the American consumer continues to benefit from the near-zero interest rates. New Home Sales data will be released on Tuesday and Existing Home Sales figures are due on Wednesday.

The housing market should benefit from the low interest rates as the average American takes out a mortgage and pays off the debt over time, but the possibility of an upcoming interest-rate increase in December may curb growth.

The Fed needs consumer spending to remain strong should it wish to hike rates.

The looming rate hike would place pressure on US corporates that earn revenue in other nations as the dollar strengthens.

Other important economic announcements to be released this week include:

Monday

• US Chicago Fed National Activity Level

Tuesday

• GB CBI Industrial Trends Orders
• US Redbook and Richmond Fed Manufacturing Index
• EA Consumer Confidence

Wednesday

• DE GDP Growth Rate Final and Market/BME Manufacturing PMI Flash
• EA Markit Manufacturing and Services PMI Flash
• US Markit Manufacturing PMI Flash and Crude Oil

Thursday

• DE Ifo Business Conditions
• US Durable Goods Orders and Initial Jobless Claims

Friday

• JP Inflation
• DE GfK Consumer Confidence
• GB GDP Growth Rate 2nd Estimate
• US GDP Growth Rate 2nd Estimate and Markit Services PMI Flash

Giacomo Bonavera is head of foreign exchange trading at Capilis Asset Managers. Click here to visit the firm’s website.