South Africa's inflation accelerates, US data eyed

Forex News and Events

South Africa’s inflation off the target band (by Arnaud Masset)

According to the latest CPI report from South Africa, inflation accelerated substantially during the month of January. After having accelerated to 5.2%y/y in December, headline CPI broke the upper band of the target range (3%-6%) as it surged 6.2% in January, beating median forecast of 6.0%. The constant pressure on the rand together with the sharp increase in food prices, mainly due to a worsening drought, have exacerbated inflationary fears as both the economic and inflation outlook have deteriorated further over the past few months. Unfortunately for Governor Kganyago, the weakness of the domestic situation coupled with the global risk-off sentiment will put the SARB in a tough situation. The South African Reserve Bank has already increased its benchmark interest rate by 0.50% to 6.75% in late January in an attempt to re-anchor inflation expectations. However, given these exceptional market circumstances, the SARB will have no choice but to proceed with another rate hike at its next meeting in mid-March. This morning, USD/ZAR was treading water at around 15.80 as the pair tested the support lying at around 15.88 (50dma), ahead of the retails sales data due later this morning.

Markets too optimistic on housing starts (by Yann Quelenn)

Housing starts and building permits are on today’s calendar. Economists forecast an increase of 2% m/m of new constructions increasing from the December data where new housing declined by 2.5%. However, building permits are expected to decrease by 0.3% m/m. It is important to notice that the current housing starts number is well below the allowed building permits data which reflects the continuing weakness of the U.S. economy. Yet, markets have priced that January will be the tenth straight month that housing starts are above a million units.

Also of note is that better labour markets as well as a growing trend in wages should normally boost housing market. Good data will help support the acceleration of the U.S. economy and allow the dollar to strengthen further. Yet, we consider that recent data is still not sufficient to trigger a Fed rate hike in March despite the Fed's decision being very dependent on supporting data. For the time being, markets are excluding any Fed action in March and inflation is currently not picking up towards the Fed’s target range of 2%.

Consequently, it is also clear that better labour markets have not spurred inflation as we believe that the reserve army of workers on the sideline is way too big to boost wage growth sustainably. As a result, we expect that the current increase in housing starts should further slow. It is then likely that the greenback should further weaken against the euro.

Silver - Failed To Break Support At 15.13

The Risk Today

Yann Quelenn

EUR/USD is now consolidating below 1.1200. The break of the rising channel confirms a negative short-term technical structure. Hourly support may be found at 1.1070 (04/02/2016 low). Hourly resistance lies at 1.1260 (10/02/2016 high). In the longer term, the technical structure favours a bearish bias as long as resistance holds. Key resistance is located region at 1.1453 (range high) and 1.1640 (11/11/2005 low) is likely to cap any price appreciation. The current technical deteriorations favours a gradual decline towards the support at 1.0504 (21/03/2003 low).

GBP/USD is declining. Hourly resistance can be found at 1.4313 (16/02/2016 high). Hourly support can be found at 1.4245 (intraday low). The technical structure suggests further downside move. The long-term technical pattern is negative and favours a further decline towards the key support at 1.3503 (23/01/2009 low), as long as prices remain below the resistance at 1.5340/64 (04/11/2015 low see also the 200 day moving average). However, the general oversold conditions and the recent pick-up in buying interest pave the way for a rebound.

USD/JPY is trading mixed. The pair has broken the hourly support at 113.60 (15/02/2016 low) before bouncing back. A break signals a weakening short-term bullish momentum. Hourly resistance lies can be found at 114.87 (16/02/2016 high). The strong support at 115.57 (16/12/2014 low) has been broken and fully erased. We start favouring a long-term bearish bias. A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems now less likely. Another key support can be found at 105.23 (15/10/2014 low).

USD/CHF is challenging the resistance area around 0.9900 (10/02/2016 high). The short-term succession of higher lows favours a bullish bias. Hourly support can be found at 0.9775 (15/02/16 low). Stronger support can be found at 0.9667 (11/02/2016 low). In the long-term, the pair is setting highs since mid-2015. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours a long term bullish bias.

Resistance and Support: