The US dollar has remained dominant over its developed economy counterparts, as depicted in Figure 1. This figure shows that the US dollar is significantly overbought when compared to its developed economy peers. This can be seen in the DXY Index, which tracks the strength of the greenback against a basket of six currencies, crossing up above it’s 200 day moving average. The 200-day moving average is a key indicator used by market traders to identify long term market trends. The flight to the dollar is largely being driven by global risk off sentiment and the continued probability of less interest rate cuts in 2024 as inflation remains sticky. In January the markets had priced in six rate cuts for 2024, as of May only two rate cuts are being priced in. The lingering risk of a second wave of inflation suggests that policymakers will opt for a cautious approach to easing monetary policy for the time being. 

Figure 1

This significantly overbought level could lead to a drop off in the strength of the dollar and a subsequent strengthening of the rand. Continued political uncertainty regarding the May 2024 elections, with the most recent IPSOS poll showing that support for the ANC has fallen to 40.2% amid load shedding, collapsing infrastructure and failing State Owned Enterprises, continues to weigh on the rand’s fortunes. The May 2024 election is arguably South Africa’s most influential election since 1994. For the first time in South Africa’s history there could be the possibility of a coalition government leading the nation. Despite this political uncertainty and continued structural decline, the rand has strengthened off the back of a commodity upcycle.

From a commodity perspective, a few commodities have been experiencing a rally, spanning from metals to agricultural products to oil. Notably, gold emerged as the top performer, with a remarkable 9% surge in March, largely attributed to central bank diversification efforts.

Unlike the dollar the Euro is currently oversold but remains strong against most other DXY composite currencies. The strength of the Euro has been driven by strong manufacturing PMI’s and positive business sentiment in Germany, the powerhouse economy of the Eurozone. Figure 2 shows that Germany’s IFO business climate survey ticked up in April with the services sector driving the positive sentiment as construction remains depressed.

Figure 2

In the East the Japanese Yen has shown substantial weakness in 2024. It has been the worst performing G10 currency against the US dollar year-to-date. Despite the fact that the Bank of Japan hiked interest rates for the first time in 17 years the yen broke above the historically significant level of 150 against the dollar in May. This is largely due to the continued strength of the dollar rather than reflecting the current state of Japan’s monetary policy. Any weakness in the dollar, therefore, could provide strong tailwinds for the yen.

Regarding the outlook for China, although the March PMI data exceeded expectations, it may not indicate a significant recovery on the horizon. Analysts anticipate that the economy will disappoint this year, as the stimulus measures announced during the March National People’s Congress may fall short of achieving the targeted 5% growth for the year.

Fundamentally, global markets are influenced by the dollar, which typically outperforms during periods of global uncertainty. Additionally, the dollar’s status as the global reserve currency provides it with significant liquidity during times of geopolitical uncertainty. This, in turn, contributes to its continued strength, particularly in light of a prolonged period of higher interest rates. However, there could be technical corrections in between periods of sustained dollar strength.