Welcome back to the Weekly Rand Review, your go-to source for the latest updates on South Africa's resilient yet susceptible currency.

Welcome to the Weekly Rand Review, and thanks for joining us as we delve into the fascinating developments that have contributed to shaping the Rand's trajectory over the last 5 days…

…and hopefully, help you navigate the next five successfully too! 😉

Last week was a big one for emerging markets as the cooling of consumer price inflation in the US injected a renewed sense of optimism into the market around future rate hikes.

As sentiment improved toward riskier assets, the Rand made a significant breakthrough, surpassing the psychologically important R18/$ level for the first time in over three months.

However, the all-important question now is, which way next?

Well, economists would say “riskier markets would likely continue to improve as long as US data points keep coming in as positive”. Right?

Wrong!

Thankfully, we aren’t economists!

The correct answer lies in identifying the underlying sentiment, which is something that “expert economists” don’t (and often can’t) do, while it’s exactly what our forecasting models ARE designed to do - in order to give us the market's expected direction for the next few days, weeks and months ahead...

...and they proved to be right on cue again (as you will see later).

Okay, that’s it for the build-up. Let’s get into the past week’s events.

Key Moments (10-14 July 2023)

These were the major headlines over the last five days:

• Local Data Results - Stats SA provided their monthly round-up of local mining and manufacturing performance, showing a mixed bag of results, though the return of higher stages of loadshedding threatens sustained improvement.
• US Inflation Eases - Consumer price inflation in the US continued to drop in June, according to results published in the week, increasing bets that the US Fed could consider a halt in rate increases in the near future.

The Rand had been teetering around the R19/$ mark over the last few weeks after a blockbuster jobs report for last month swayed sentiment in favour of the greenback.

After making a late comeback the previous week, the local unit got started at R18.89/$ on Monday morning.

Owing to the cold weather across most parts of South Africa over the last couple of weeks, Eskom announced stage 6 loadshedding for the week as they battled to keep up with the demand arising from the increased use of high-voltage appliances such as heaters.

Not to mention that the failed power utility perhaps have an even bigger problem brewing with coal trucks being hijacked and set alight across the country by the coal cartels...

The local unit gave up some ground as sentiment soured slightly but stabilized through the evening and into Tuesday with limited data points to sway investors one way or the other.

The major results locally in the week came in the form of Stats SA’s release of the crucial mining and manufacturing production results and showed that seasonally adjusted mining production fell sharply by 3.8% in May, compared to a 1.5% increase in April.

Leading the main negative contributions were platinum-group minerals and diamonds, which dropped by 7.2% and 31.4%, respectively.

Meanwhile, manufacturing production rose by 2.5% year-on-year in May, continuing its solid performance from a month earlier, when a 3.6% increase was recorded.

The largest positive contributors were vehicle parts and accessories (+15%) and basic iron and steel (+5.8).

Wednesday was the big one as all focus shifted to the US and, more specifically, consumer and core inflation results.

The Bureau of Labour Statistics revealed that consumer price inflation in the world’s top economy slowed to 3% in June, down from 4% in May, marking its lowest level since March 2021.

Core inflation also improved to 4.8% from 5.3% in the year to May, but it is still well outside the Feds target and dropping much slower than they would have liked.

US headline inflation has now decreased for 12 consecutive months, and while most market participants have already booked in a 25 basis point increase at the next meeting, there seems to be increasing belief (for now at least) that the next rate hike could be the last one for a while.

But as we know, that can change at the snap of a finger.

Nevertheless, the ensuing sentiment increased investor appetite toward emerging markets, and the Rand began its descent, reaching R18.13/$ by the close of play on Wednesday.

The local unit held its gains overnight and picked up where it left off at first light as it surged below R18/$ by lunch and onward to the mid–R17.90s by the evening session, reaching its best level in almost a month.

Did our forecasting model see it coming?

It certainly did!

Back on Friday, 7 July, we saw the Rand as having topped or about top top in that 18.78-19.23 target area, and the expectation being for a strong reversal to sub R18.42 levels, targeting 18.11 and possibly stronger than that - as shown below.

(Click to enlarge)

What a comeback, and right on cue!

Ok, so great results from a trading perspective, but what does that mean for the local economy and consumer, you ask?

Well, if the Fed delivers on expectations of a quarter basis point increase at its next meeting, SARB have a tricky situation on its hands, having opted to pause its interest rate hiking in July.

If SARB opts to leave interest rates unchanged again at its next meeting, local rates could be at risk of slipping significantly below the US, which, as we know, plays a can play a role in determining investor appetite for a particular asset...

...in this case, the Rand.

A survey in the week showed various forms of credit facilities were accessed by Saffers over the last six months, with personal loans, credit cards, and home loan excess funds all being used at an alarming rate, underling the constraints that consumers are facing already.

Among the headline figures in the survey were:

• 55% of respondents increased their card limit in the last six months
• 33% took money from the excess in their home loan
• 29% secured a loan from a financial institution
• 21% secured a loan from friends/ family

In addition:

• 58% of respondents said they are struggling to pay their home loan installment
• 36% are struggling to make car payments
• 40% are struggling to keep up with credit card bills
• 46% are struggling to pay for groceries

Further than that, a widely used BankservAfrica salaries report in the week showed that pay over the last five years in SA had grown by 22.8%; however, the CPI rose by 26.6% over the same period…

…essentially meaning that Saffers have gotten poorer over the last five years.

Well, most Saffers.

However, keeping up with US rates would mean that further increases were required locally, and the SARB have unequivocally shown (time and again) that they care very little for consumers in their pursuit to tame inflation…

…and on that basis, there could be a situation building where further rate hikes are forced to be implemented in order to maintain the Rand’s purchasing power rather than to bring down inflation.

All very tricky business, but ultimately the Fed’s next move will give us some indication of what is to come as far as ongoing monetary decisions go.

Coming back to last week, though - the local unit held its ground through Thursday night and was on course for an excellent week.

But before we get to the close, let’s take a look at some other significant movers in the week:

• The impact of lower yields for treasuries and reduced interest rates reverberated in the gold market, sparking renewed interest among investors. With the greenback weakening in the week and the appeal of other traditional safe havens, such as bonds diminishing, gold regained its shine as a preferred choice for wealth preservation. This sentiment was evident as gold prices improved and were trading back in the $2000 per ounce region.
• Meanwhile, Brent crude oil experienced a nearly 2% increase, reaching its highest level in over two months. This upward movement was driven mainly by investors responding positively to signs of cooling inflation in the US, while simultaneously, optimism is growing regarding the possibility of Chinese authorities introducing additional measures to stimulate economic growth. As a result, Brent crude was trading in the region of $81.
• And in a landmark win for the crypto industry, the long-awaited judgment in the SEC vs Ripple was handed down on Thursday, stating that Ripple's XRP coin did not class as a security when sold on exchanges, which could impact on the SEC's war on crypto platforms. The market jumped on the news, with XRP almost doubling in value before giving some back.

By Friday, the Rand lost some ground as loadshedding was ramped up ahead of the weekend but was still trading much better off from where it began.

After opening at R17.94/$, the local unit settled around R18.10/$ and saw out the week with a big green arrow - as expected!

And we’re pretty confident about where it’s off to next.

If you would like the inside scoop too, be sure to get in touch!

The Week Ahead (17-21 July 2023)

Another week that will likely be dominated by global events. Here’s what we’ll be keeping an eye on:

• SA - Inflation Rate YoY (Jun), Retail Sales YoY (May), Interest Rate Decision
• EU/UK - EU Core Inflation (YoY (June), UK Inflation Rate YoY (Jun)
• US - Retail Sales MoM (Jun)

Next week will be an important one locally, with inflation results due and the all-important interest rate decision shortly thereafter.

A 25 basis point increase is certainly on the cards after the events last week, and there is a legitimate argument to be made that it will be necessary at some stage for the Rand’s sake.

And while that may be another dagger in the consumer’s pocket, the economy will still creak along regardless - well, that’s how the SARB would likely see it anyway.

We also cannot help but watch the Zuma drama playing out, after the Constitutional Court ruled he should return to prison - and what followed was more violent protests, with the army being deployed to try and keep law and order...

...where to next?

Come back next week to find out how it all unravels.

Till then, Safe Trading!

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To your success~

James Paynter

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