Week Ahead Figure 1

External considerations additionally affected the rand dynamics, with heightened political risks ahead of the UK election, the ECB policy announcement and the retreat in oil prices. Heading into next week, the rand remains vulnerable to event risk pertaining to the Moody’s credit rating announcement scheduled for this evening. SA’s sovereign credit rating on both local and foreign currency debt is presently two notches above non-investment grade. Moody’s is expected to announce a one notch downgrade. The risk relates to a two notch downgrade to non-investment grade.

The rand is expected to trade in a range of R13.40/USD – R12.40/USD, R14.90/EUR - R13.90/EUR and R16.90/GBP - R15.90/GBP.

(VC) The Federal Open Market Committee (FOMC) is set to announce its latest policy decision on Wednesday. Updated economic projections and the latest FOMC participants ‘dot plot’ of the appropriate Fed Funds rate path will also be published, whilst Fed Chair Janet Yellen will give a press conference. We expect a 25bp rise in the Fed funds target rate taking the range up to 1.00%-1.25%, as the Fed presses ahead with its planned normalisation of monetary policy.

In terms of the overall tone of the accompanying material, we expect no major shifts. Indeed, we expect the Fed’s policy statement to reflect the continued declines in the unemployment rate, which reached the lowest level since 2001 in May, at 4.3%. Despite the decline in the jobless rate, the Fed can still, however, afford to sound relatively relaxed about upside inflation risks because of the lack of upward momentum in pay growth. And on the broader economic backdrop, we anticipate that the Committee continues to view the slowing in GDP growth during the first quarter of 2017 as transitory, expecting a solid rebound in Q2.17.

We suspect that one purpose of this meeting will be to advance discussions on balance sheet normalisation. The guidance on balance sheet shrinkage has so far simply pointed towards a ‘low’ pace of asset roll-off being permitted initially, but with no specific numbers provided as yet. The Fed is likely to continue discussing the numbers on this, such as how much of each asset (Treasuries, MBS etc.) to let roll off its balance sheet as it commences this process. A formal announcement of the intention to begin that roll-off is a likely to come at a subsequent meeting, perhaps in September.  

Week Ahead Figure 2