12/04/2022
Currency Performance Report: As at 31 March 2022. (Sanlam Investments)
Following a difficult start to the year, global stock markets found some respite in March. Investors were slightly more optimistic as a result of the clarity provided by the Federal Reserve (Fed) on its monetary policy path, which has helped reduce some of the market's uncertainty. The ongoing talks between Russia and Ukraine, as well as hopes for a resolution to the war, further boosted market sentiment. As a result, the Dow Jones Industrial Average increased by 0.3%, the S&P 500 increased by 0.81%, and the Nasdaq Composite increased by 1.9%. The pan-European STOXX 600 index rose by 0.84%, while the MSCI world stock index rose by 0.86%.
Locally, despite the selloff in other emerging markets, equities remained resilient with the FTSE/JSE All Share Index closing the month relatively flat with 0.01%. The financial sector performed the best, advancing by 12.19%, but it was dragged down by both the resource and industrial sectors, which returned -2.03% and -4.87%, respectively. After two months of declines, listed property in South Africa rebounded by 5.05%.
Developed market currency performance
Japanese yen
The Japanese yen fell sharply. The sharp depreciation this month has resulted from the Bank of Japan's and the United States' Federal Reserve's divergent monetary policy stances, with the latter maintaining hawkish rhetoric that translated into its first-rate hike since late 2018 at its mid-March meeting. In contrast, the Bank of Japan held its interest rates steady at its March meeting and signalled that asset purchases would continue throughout the year. This, coupled with rising inflationary pressures exacerbated by the energy price spike caused by Russia's invasion of Ukraine in late February, has resulted in pressure on the yen throughout March.
Australian dollar
The Australian dollar rose after the Reserve Bank of Australia (RBA) abandoned its cautious language and signalled that interest rates could be raised within months if wage and inflation data were strong. The central bank also maintained the cash rate at a record low of 0.1%. While acknowledging the upward trend in inflation, RBA Governor Philip Lowe stated that before raising interest rates, the Board wanted to see actual evidence that inflation is sustainably within the 2% to 3% target range. He also mentioned that labour-cost growth has been slower than what is likely to be consistent with inflation remaining at target for the foreseeable future. In other news, the Australian dollar has recently benefitted from higher commodity prices, owing to the country's status as a net energy exporter and major producer of other basic materials.
US dollar
In March, the dollar index strengthened and a strong US jobs report bolstered the case for more aggressive Federal Reserve rate hikes to tame decades-high inflation. The dollar also rose sharply against the euro as new sanctions against Russia were discussed. The United States and Europe have vowed to punish Moscow for the deaths of civilians in northern Ukraine, with French President Emmanuel Macron suggesting sanctions on Russian oil and coal.
Emerging market currency performance
Turkish lira
The Turkish lira fell as the prospect of additional sanctions against Russia put pressure on the Turkish government's fragile lira deposit protection scheme, while worsening the outlook for the country's important tourism industry. Meanwhile, Turkey's inflation rate rose to a 20-year high of 61.1% in March, while producer prices rose to a 27-year high of 115% due to lower interest rates and rising energy costs. The Central Bank of Turkey held its key borrowing costs steady in its March meeting for the third time since September.
Russian ruble
Meanwhile, the US Treasury barred Russia from accessing its dollar reserves in the US, preventing Russia from making over US$600 million in principal and coupon payments on dollar-denominated sovereign bonds. After falling against the dollar in March as a result of sanctions, the ruble recovered those losses as authorities raised the policy rate to 20%, imposed strict capital controls, avoided sovereign defaults, and helped stabilise financial markets.
South African rand
The South African rand strengthened as precious metals prices rose and markets welcomed Moody's upgrade of the country's outlook to "stable" from "negative." Furthermore, the South African Reserve Bank's forecast of continued monetary tightening and a better economic outlook provided additional support. On 24 March, the central bank raised interest rates by another 25 basis points. In addition, South Africa has experienced a sustained return to improved economic growth, fuelled by higher commodity prices and a return to pre-pandemic conditions. Nonetheless, the prospect of a more hawkish Fed and the uncertainty surrounding the war limited gains.
Outlook
Globally, the post-Covid-19 pandemic recovery is hampered by a potentially massive global supply shock, which will slow growth and raise inflation. The conflict in Ukraine, as well as economic sanctions imposed on Russia, have put global energy supplies in jeopardy. Russia provides approximately 10% of the world's energy, including 17% of natural gas and 12% of oil. The increase in oil and gas prices will increase industry costs while decreasing consumers' real incomes. If Russian supplies are abruptly cut off, Europe may face severe shortages and energy rationing.
The most direct impact of the ongoing conflict between Russia and Ukraine on South Africa will be upward pressure on producer and consumer prices. Around 10% of South Africa's wheat consumption is typically imported from Ukraine and Russia, exposing the South African market to supply shortages and 15-year high global wheat prices. On the energy front, South Africans already paid R1.46/litre more for petrol in March. Meanwhile, the World Bank, which is optimistic about its new relationship with South Africa, announced that it will collaborate with Eskom and Transnet to support projects that will increase South Africa's investment potential.
