Rally of the Rand continues despite Eskom woes

Another week passes by, and another week of Rand wins at the same time.

It was another one dominated by global news, as the US stimulus and economic outlook were the main talking points.

Will the stimulus result in the kind of economic recovery that Biden is looking for? Or will it more likely end in a flash in the pan, followed by a slow grind of a weakening Dollar...?

Whether we see such a hoped-for recovery, one thing is clear, and that is that pumping stimulus into an economy is more of a short term "sugar rush", while in the longer term, the effects will likely be crippling.

Anyway, let us get into the full review, as we see the Rand make a run on the Dollar once again!

Here were some of the biggest headlines from the 5 days:

• Powell's speech - the outlook for the next few years is certainly an interesting one, as markets reacted violently to the Fed speech...
• Eskom woes - the SOE cannot catch a break as years of mismanagement are resulting in multiple failures, breakdowns...what does the future hold?
• Stimulus cheques - in the fastest ever release of funds, the IRS has already pushed millions of stimulus payments into bank accounts… what will the effect be?
• Third wave? - Mboweni warned of further trouble should a third wave of infections hit SA...

So the Rand opened around R14.95, having gotten the better of the USD and hoping to continue the trend.

It was a big week of economic activity, and all eyes were on how China's recovery was progressing - especially SA, with China being its the biggest trading partner.

And the news from China was good: they saw a year-on-year increase in Industrial Production of 35%, well above the market estimate of 30%.

This suggests that the world’s 2nd largest economy is clawing its way out of last year’s 'pandemic'-induced economic slump, which will benefit the local unit in the form of raw material exports to “the world’s factory”.

Supply chain issues continue to plague the distribution of those goods though, as shortages of goods worldwide are becoming the norm - an amazing shift from persons buying services, to persons buying physical products.

And this is what we are watching to see happen from the US stimulus…will it be a rush of consumer buying that will help generate additional business?

Millions of Americans have already received payments into their accounts, as the IRS has distributed this round the fastest so far, and we now await the reaction. The crazy thing is just how much of this stimulus is money unrelated to the pandemic, and completely partisan agenda based, as detailed in this report that showed the 3 stimulus packages costing Americans $17k per individual and $69k per family on average.

Some stimulus!

The fact is that the best stimulus would be just to let the country get back to work without any lockdowns and restrictions, as Florida has clearly shown versus full lockdown states like California and New York.

And then as for the Rand in the first of the week, it was mostly sideways trade, with the Rand reaching Wednesday just a touch under R14.90...

But Wednesday was the moving day, as stimulus cheques arrived, and the Fed's Powell took centre stage with his comments:

• The reserve’s easy-money policies were to remain in place until the US economy recovers further, with a continuation of the asset buying program of at least $120 billion in bonds a month.
• Interest Rates to be kept at 0.25%.
• Upticks forecast economic growth rates (4.2% up to 6.5%) due to the stimulus package have turned the investors toward being risk-on
• The Fed does not see inflation really rising materially above 2% throughout their forecast horizon, through 2023.

On this news, 10-year Treasury yield climbed above 1.7% and the 30 year briefly over 2.5% - and stock markets took a tumble on Thursday as this played out.

It is certainly an interesting view that while there has been good signs of recovery, Powell is clearly not saying that all is well - and is instead keeping at it with additional support for the economy.

The next few months are going to be telling...

...but already his comments had an impact, as the move triggered a Dollar collapse, with the ZAR gaining 22c in a single hour following his remarks, then trading as low as R14.61!

And then in other news:

• Locally, Eskom woes continued. They have decided to further extend load shedding and the future is looking bleak. Andre de Ruyter warned that South Africans should brace themselves for another 5 years worth of electricity deficit - such has been the level of mismanagement. The current shortfall of 4000MW may well be larger if the economy grows, which is a real concern, as this will be another stifling effect on the economic recovery. One thing to combat this was Ministry of Energy Gwede Mantashe unveiling 8 independent power supply bidders to try boost production. It remains to be seen as to how this will play out over the coming months...but maybe some light at the end of the load shedding tunnel?
• High fuel costs are showing no sign of stopping as the AA warned that SA should expect "extremely high" prices by the end of this month. Oil has in fact retreated back below $70 a barrel, even closer to $60, but the damage was done. As thing stood at the time of the statement, they expected an increase of 90c for petrol and 66c for diesel...ouch!
• Over in the US, retail sales dropped more than expected for the month of February (-3% vs -0.9% expected). With unseasonably cold weather the likely "culprit" for weaker sales, it is not to wait and see if the newly approved stimulus package will boost economic activity in the coming months. Jobless claims indicate that the economic recovery is far from over, with 770,000 claims despite all the reopenings across the country...
• Locally, Tito Mboweni gave a warning for local hopes of a return to normal, saying that a 3rd wave of infections would be even more deadly and disruptive than the 2nd wave, and would ultimately hit SA harder. (Yes, if this brings in government lockdowns - perhaps Mboweni needs to look at the actual statistics and facts). He also stated that he felt it was "unfair" of ratings agencies to downgrade SA in the middle of a pandemic, and he was going to tell them that. A pretty bullish attitude...we will see what comes of it.

To get back to the Rand, we saw the market retrace a little to close out Friday in the low R14.70s, after nearly breaking R14.60 on Thursday.

And so the next week of Rand gains ended - the second week running. Will there be a third as momentum starts to build...or will it be time for the Dollar to make a recovery?

And as we roll into the latter half of March, we have a few events of interest coming up, including SA's interest rate decision:

• SA - Inflation Rate, Interest Rate Decision
• USA - Fed's Powell speeches & testimony, GDP, Jobless Claims, Trade Balance
• UK & EU - Consumer Price Index

The Rand has had another good run the past week - can it continue its gains or are we looking for more weakness to set in?

Based on our current pattern analysis, it may edge lower but does seem to be losing some momentum, and we have two scenarios that could be playing out in the short term, and will be watching key levels over the next few days to confirm which one is playing out.

(You don't want to regret not having done so this time next week...)

Look forward to hearing from you.

To your success~

James Paynter