In what was a relatively light week of domestic economic data, the rampant greenback continued its path of destruction...

...leaving riskier currencies like the Rand scrambling for cover. Investors could have been forgiven for heading into the week tentatively - as they searched for signs of how markets would react to another aggressive rate hike in the US.

While indications suggest that inflation may have peaked in the world's number one economy, clouds of recession have gathered at pace elsewhere. This was so most notably in Europe…

…where inflation continues to undercut consumer spending showing no signs of letting up anytime soon. Would the ECB and BoE consider larger percent rate hikes? We were expecting a dicey trading week, and that’s exactly what we got.

Let's get into the full review!

Key Moments (26-30 Sep 2022)

These were the major talking points for the week:

• Positive PPI Results - SA’s PPI showed signs of improvement, but food and beverage prices remain at record levels.
• Eurozone Inflation - Reports on Friday showed inflation in the Eurozone accelerated to its first-ever double-digit levels.
• Trust Truss? - GBP recorded its lowest level since 1985 as markets grow concerned about the state of the UK economy and recent decisions by its newly elected PM.

As the dust began to settle from a frantic end to the previous week, we headed into Monday, firmly expecting a difficult week for the local unit…

…and by as early as first light on Monday morning, the Rand was already well and truly on the back foot. Overnight the local unit took a pounding, breaking through the psychological barrier, as it traded at a morale-sapping R18.05/$ by the time markets opened. The downbeat mood was soon worsened as President Cyril Ramaphosa addressed the media later in the day, confirming that loadshedding would continue to be implemented for the rest of the week.

Despite Eskom reducing loadshedding from stage 6 to stage 4 last week, the news could not have come at a worse time investors were already fretting over interest rate hikes and piling into the US dollar as a safe haven.

The Rand continued to take a beating through the day, reaching as high as R18.12/$ on Monday evening. When we judge the Rand against its emerging market peers, we can see the impact that the last 9 consecutive weeks of loadshedding has had on the economy. (see below)

Only Brazil has performed worse against the US dollar than SA among the major emerging economies over the last month.

Can the Rand pull itself back by December this year?

With crucial GDP readings due in the not-too-distant future, there are justified reasons for concern for the local economy and its prospects of expanding in the near term. The Rand made back some ground on Tuesday and was trading in the mid R17.80/$ region by early afternoon as reports surfaced showing that SA’s PPI had eased to 16.6% versus 18% in July…

With the global price of grains having fallen in recent weeks, are we going to see any signs of inflation in food reaching its peak soon?

Let’s hope so!

Wednesday brought with it major market movement as the Chicago Fed President Charles Evans reiterated that a hawkish stance is still required in the near term to return inflation to its target range. The news jolted markets yet again, causing riskier assets to collapse, with the local unit showing up at R18.22/$, setting a gut-wrenching 28-month low! The picture was fairly similar over in Europe, where the Euro had slipped to Є0.955/$ but was overshadowed by the turmoil unfolding next door in the UK…

…where the GBP had hit a new 37-year low of £1.0356/$!

The BoE and newly elected Prime Minister Liz Truss were put under the spotlight for their recently implemented sanctions around tax cuts and the pledging of $71 billion of support to the shattered financial market in fear that pension funds may go under.

This raises a number of crucial questions:

• What impact will the borrowing of billions of dollars have on the UK’s long-term interest rate?
• Should we expect a full percent rate hike in November, or even higher?
• What sort of knock-on effect does this create for other countries, especially in the Eurozone?

What is clear, though, is that investors seem to be steadily losing confidence in the UK government's approach with a recession already predicted to be confirmed in Q4. Meanwhile, over in the US, speculation has begun to swirl following a jobs report in midweek that suggested that employment conditions may be weaker than headlines suggest.

According to US unemployment data, 315,000 jobs were added in August; however, counting payrolls doesn't measure unemployment; it merely estimates the number of jobs created…

…unemployment is calculated by the US household survey since it counts people and whether they’re employed or not. And based on a recent version of the household survey, it seems that there is an increase in multiple job holders as opposed to more people being employed.

Another key factor uncovered was the falling number of full-time jobs as part-time employment made up the majority of the gains…

…further indicates that people are taking up a second or even third job to maintain some sort of acceptable living standard. This underlines the caution one needs to practice when using news and headline figures to make investment decisions, as there’s usually key info that economists overlook in order to justify their personal views or a particular narrative.

And then in other news:

• Global conflicts continued, with Russia and Ukraine being centerstage...

  Early in the week, both the Nord Stream pipelines were ruptured with explosions being recorded, significantly escalating global tensions as Putin blamed the West for the suspected sabotage (and vice versa). Many questions here, the main one being: Who would most benefit from such an action?

  And then, in a ceremony on Friday, Putin announced that four Ukrainian regions where referendums were held and are now part of Russia, with Ukraine and the West denouncing the referendums and refusing to recognize this.

  Meanwhile, tensions have also been flaring between long-time rivals Turkey and Greece after the former accused Greece of deploying US armored vehicles on two islands near the Turkish coast.

• Crypto markets have also been sluggish over the last few weeks. Despite market leader Bitcoin returning to the $20,000 mark briefly in the week, the growing consensus seems to be an expectation of a full-on crypto crash as traders factor at least a further 100 basis point increase by the end of the year.
• Gold prices continued on a downtrend after a short-lived respite, sparking fears of further erosion of the precious yellow metal with ongoing aggressive rate hikes on the cards.

As we entered Friday, the final major headlines of the week came in the form of the Eurozone's inflation results, which surged to 10% YoY, marking the first-ever double-digit inflation reading for the 19-country economy. Energy and food were the main driving forces, although core inflation is also expected to reach an all-time high of 4.8%.

What’s interesting is that the key difference seems to be that inflation in Europe is more supply-driven as opposed to demand-propelled as in the US…

…which creates a unique set of difficulties for the central bank to deal with.

Readings of this nature have proven critical in adding momentum toward large rate hikes, and it would come as no surprise if that trend continued when the ECB addresses the nations on October 27th...

The Week Ahead (26-30 Sep 2022)

Full steam ahead into Q4 we go. Here are the major events we’ll be eyeing up next week:

• US - ISM Manufacturing and Non-Manufacturing PMI, Non-Farm Payroll, Unemployment Rate
• EU - ECB Monetary Policy Meeting Accounts
• SA - S&P Global PMI (SEP)

Back locally, the Rand struggled to find traction through the back end of the week, and after flopping back and forth, it eventually closed off the week at R18.03/$. The local unit is starting to look increasingly comfortable around the R18/$ mark, which is terrible news for Rand bulls…

…and while optimists may feel that the Rand is being oversold due to an uncertain market, there’s little to justify a change in that anytime soon. But as you well know by now, the markets are not driven by rationality or by fundamentals, and just when it seems everyone has given up on a market, a trend change is likely on the cards.

Q4 is already shaping up to be a belter, and we’ll be right here to keep you right up to date. Until then!

Best proceed with caution. It’s a treacherous road ahead. We’ll be relying on our Elliot-Wave based forecasts to provide some direction. You can too!

Please take our Rand forecasting service for a test-drive!

This will give you access to the same charts we are to give us and our clients the likely direction of the Rand - ahead of time, enabling you to make educated and informed decision.

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To your success~

James Paynter