Greetings and welcome back to the Weekly Rand Review.

And what a week it was!

The last five days were marked by turbulent tides in global financial waters, and the South African Rand found itself caught in the eye of the storm, crashing past the dreaded R19/$ mark.

A potent cocktail of factors, including shifting market sentiment and hawkish signals from the Federal Reserve, bolstered the greenback, making it a force to be reckoned with in the global currency arena last week.

Additionally, the local load-shedding woes, courtesy of Eskom's all-too-familiar troubles, weighed heavily on the Rand's value, exacerbating the already turbulent tides.

A tough week for Rand backers - so let's get into the recap:

Key Moments (4-8 September 2023)

These were some of the major headlines over the last five days:

• Guess Who’s Back - With the BRICS Summit now come and gone, Eishkom made a comeback to headlines last week, as the power utility ramped up loadshedding owing to apparent breakdowns of key operating units.
• Local GDP Improves - Results released in the week showed that the South African economy grew more than expected between the first and second quarter, though looming prolonged power cuts now threaten the likelihood of ongoing improvements.
• China Woes Continue -For the fourth consecutive month, China's export sector is grappling with a downturn as global demand for Chinese-made goods continues to plummet amid ongoing trade disputes with the US.

The Rand opened the week flat on its previous close but was forced onto the backfoot early as Eskom announced the re-implementation of Stage 6 loadshedding.

After opening trade in the R18.80/$ region the local unit began its first ascent of the week, crashing past the R19/$ barrier by mid-afternoon and onward to R19.10/$ by the end of the day.

On Tuesday, data showed that the South African private sector activity marked a noteworthy turnaround by expanding for the first time in six months in August, with increased demand prompting businesses to ramp up their production.

The S&P Global South Africa Purchasing Managers' Index (PMI) climbed to 51.0 in August, up from July's figure of 48.2.

It's important to note that a PMI reading exceeding 50 signifies growth, indicating a favourable upswing in the country's private sector activities. However, that did nothing to impact the local unit’s value, which was firmly set in the mid-R19.10s for most of the day. While loadshedding was made out to be blamed for the Rand’s drop in the week, there were a couple of more significant triggers abroad too...

In terms of the surging dollar, there are two primary factors at play: firstly, the dollar's inherent strength and secondly, the more significant impact of struggling alternative currencies and economies, especially China's post-pandemic recovery challenges.

...including the near bankruptcy of some major Chinese property firms, an all-time high in youth unemployment in China at over 20%, and growing political concerns deterring investors.

The ongoing trade tensions with the US and the repercussions of the pandemic have also led to a significant decline in global demand for Chinese-manufactured products, which represent a crucial driver of economic growth for China.

According to a recent report by the US Census Bureau published on Wednesday, China's portion of US goods imports reached its lowest point since 2006!

Quite astounding!

Over that time frame, Chinese imports accounted for 14.6% of total goods imported by the US, a notable drop from the peak of 21.8% observed in the year ending March 2018…

…prior to the escalation of the US-China trade conflict under the leadership of then-President Donald Trump.

Moreover, China is also grappling with a deepening crisis in its real estate market, with several major property developers facing severe financial challenges. This is more than just about Evergrande and Country Garden, it is the whole sector...

...to give some pespective, the default rate (actual plus technical default) of Chinese real estate USD bonds has risen above 50 percent!

This is a market sector in serious trouble.

Beijing has opted not to implement a substantial stimulus package to stimulate economic growth...

…instead, it has chosen to introduce a series of measures in recent months aimed at providing support to both individuals and businesses.

Bottom line?

For South Africa, a nation heavily reliant on commodity exports, a slowing Chinese economy brings unfavorable implications for both the economy and the value of the Rand. And the loss of appeal for the local unit was evident as investors reallocated their assets to the dollar in bulk.

The Rand reached the week’s low of R19.34/$ on Wednesday despite results showing that the economy exhibited unexpected resilience...

...registering a growth of 0.6% from the first to the second quarter, despite facing a series of challenging circumstances.

This robust performance was buoyed by the notable strength of the manufacturing and mining sectors, which helped counteract the adverse effects of soaring interest rates, disruptions at Transnet, and a sharp depreciation of the Rand due to the diplomatic tensions involving the Lady R saga.

Lower levels of loadshedding in June also provided a significant boost to the manufacturing industry, which expanded by 2.2% during the second quarter.

Notably, 6 out of the 10 industry divisions recorded growth, according to Statistics SA's report.

However, a separate report from the National Credit Regulator showed household incomes are failing to match financial demands, leading to an increase in delinquent debts, with over 70% of recently submitted credit applications being denied.

So calm before the storm?

Cheap money has run out in the USA, and it is having a huge effect on startups and businesses alike. This kind of effect filters down to economies like SA's pretty fast, and it affects everything from personal to business credit...

By Thursday, the Rand was trading around R19.20/$ with the final major piece of local data incoming.

In Q2, SA’s current account deficit expanded to 2.3% of gross domestic product, up from a revised 0.9% in the first quarter, as per data released by the central bank.

The South African Reserve Bank explained that the increase in the value of imported goods and services was mainly due to higher volumes, while the decline in the export of goods and services was attributed to lower prices. In terms of the South African Rand, the current account balance for the April-June period indicated a deficit of R160.7 billion ($8.36 billion).

The dollar weakened globally on Thursday but was still well up on the week while the Rand was poised for a big red arrow heading into Friday.

Before we continue, let's take a look at some of the other notable stories of the week:

• Business confidence in South Africa ticked up during the third quarter, as a reduction in power cuts offered some relief to businesses grappling with high interest rates. This information comes from a survey conducted by Rand Merchant Bank (RMB) and compiled by the Bureau for Economic Research.
  
  According to the survey, the business confidence index increased to 33 points in the third quarter, up from 27 points in the previous quarter. Notably, sectors that are consumer-facing, like automotive and retail, experienced a rebound following a significant decline in the previous quarter. This improvement was attributed to softer prices, which contributed to higher profitability despite sluggish sales.
• As South Africa faces getting out of the winter, Eskom still remains a serious issue sitting at Stage 6 load shedding. The cause this time is said to be a ramp-up in planned maintenance overlapping with unplanned breakdowns...same old same old?

  For all of the promises of Pravin Gordhan, Cyril Ramaphosa and many others, the situation at Eskom has not improved at all. Africa's first Climate Summit just happened, and international views are clear - Africa is saying "Invest in Us". If SA is expecting to be included in this, they are going to have to right the wrongs of the past, and show that gross mismanagement of funds and corruption has been rooted out...and right now, showing that to the world is not looking promising.

As markets calmed leading up to the weekend, the Rand found some support, though it was still above the key R19/$ mark.

With no major data results scheduled, the local unit drifted sideways into the weekend around R19.15/$ for back-to-back red arrows...or is it red cards with the action in France?

The Week Ahead (11-15 September 2023)

Here's what we'll be eyeing up over the next five days:

• SA Manufacturing and Mining Production YoY (Jul)
• EU/UK UK Unemployment Rate (Jul), UK GDP YoY (Jul), ECB Interest Rate Decision
• US Inflation Rate YoY (Aug), PPI MoM (Aug)

Looking ahead to the coming week, the financial markets are poised for another eventful period. One of the major highlights will be the release of inflation rate results in the United States, which are expected to garner significant attention and could potentially sway market sentiment.

In Europe, it is a crucial week as well, with key economic data expected from both the UK and the European Union and are likely to have a substantial impact on the corresponding currencies and potentially set the tone for market movements.

Don’t forget - if you're interested in obtaining comprehensive forecasts for the Rand, the US Dollar, or European currencies, don't hesitate to reach out to us.

Until next week.

Perhaps the Boks will do better than the Rand did!

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To your success~

James Paynter

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