We're back with another edition of your favourite Weekly Rand Review.

SA Rand back to R19/$. Last week proved to be another tumultuous ride as global shifts significantly influenced the South African Rand.

The Dollar's growing strength amidst strong economic indicators and global uncertainties made waves, causing emerging market currencies like the ZAR to face a bit of a struggle.

An then, the escalating conflict between Israel and Palestine - and the ANC government's historical and current stance - has added to these challenges, making the geopolitical landscape a critical factor in the Rand's performance.

Amid this backdrop of international dynamics, the week unfolded with a paucity of local data results, leaving the Rand particularly exposed to external influences.

Let’s dive into it...

Key Moments (9-13 October 2023)

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

• Israel/Gaza Conflict - The US dollar gained strength against a basket of worldwide currencies amid escalating clashes between Israeli forces and the Palestinian militant group Hamas, prompting investors to seek refuge in the safety of the greenback.
• Local Data Results - In August, the production sectors of South Africa's economy encountered varying outcomes, with mining output declining beyond projections while manufacturing witnessed an increase.
• US Inflation - The Consumer Price Index in the US saw a rise for the 12 months ending in September, maintaining stability compared to August's annual gain, marginally exceeding economists' expectations.

The week began with the Rand around R19.33/$, slightly up from where it ended the previous week.
With a thin week of data expected, the local unit was poised to take its cues from events abroad...

...and this is just what we saw, with the conflict in the Middle East dominating the week with ripple effects on all markets.

Unsurprisingly, as tensions heightened between Israeli forces and Palestinian militant group Hamas, the US dollar gained strength across all markets, affecting all currencies. And although South Africa may be physically distant from these conflicts, today's globalized world means such events have wide-reaching effects on market sentiment!

South Africa's political stance is also having an influence.

While neutrality has been professed in international matters like the Russian/Ukraine war, actions have said otherwise. The ANC's historic and closer ties with Russia (and China) have already strained its relations with the West...

...with the US currently reviewing their relations with SA due to the ANC's repeated support of Russia, as well as their communistic policies and agenda.

And now once again, SA is going to find itself at odds with the West with the government's public support of Palestine and the Hamas attack on Israel.

The US have close relations with Israel, while South Africa have expressed their support for Palestine in the past - and now have doubled down on this, with recent comments...

...which could well bring some serious backlash in time.

Geopolitics aside, this conflict is also perceived to pose a potential risk of exerting upward pressure on oil prices, thereby heightening concerns about potential inflation.

It's worth pointing out, firstly, that neither Israel nor Palestine are oil producers.

However, the Middle Eastern region plays a significant role in supplying approximately one-third of the world's oil requirements, and the conflict threatens to spread to neighbouring oil-producing nations such as Saudi Arabia and Iran. If that were to happen, there could be further sanctions imposed on oil production and/or supply, depending on which side of the fence nations stand.

Already, oil is trading higher...watch this space.

On Tuesday, the Rand found some support, and after opening in the mid-R19.30s, the local unit managed to pull back to the R19/$ mark. The gains were mainly fueled by a weakening US dollar, enhanced market sentiment, and a decline in US Treasury yields earlier in the week.

Later that day, local census data revealed that South Africa’s population had grown to 62 million people last year from 51.8 million back in 2011.

Stats SA added that there were over 2.4 million migrants in the country last year, with 45.5% of these from Zimbabwe, followed by Mozambique and Lesotho. With the continued mismanagement of government resources, lax of tax revenue, this puts the ANC in a difficult position - how do you provide services to this many more persons? Where are the funds going to come from for infrastructure?!

Many questions to be answered!

Midweek attention turned abroad for the release of the FOMC minutes from last month, which revealed there were divergent opinions on whether additional interest rate increases would be necessary. However, the prevailing sentiment leaned towards the likelihood of one more hike.

The document showed full agreement among all members of the rate-setting Federal Open Market Committee that they could "proceed carefully" in future decisions…

…and that those decisions would be based on incoming data only.

Another point of complete consensus was the shared belief "that policy should remain restrictive for some time until the Committee is confident that inflation is moving down sustainably toward its objective.”

The Rand continued to gain off the back of an easing Dollar and was trading in the mid-R18.80s by the end of the day. Thursday brought us the latest round of inflation results from the US.

The Consumer Price Index indicated a 3.7% rise for the 12 months ending in September, maintaining stability from August's annual gain.

While the headline inflation rate for the year held steady, the CPI report also highlighted positive developments in key areas crucial to American households and the Federal Reserve.

Of note, food price inflation is currently at its lowest rate since March 2021, aligning with the overall inflation rate of 3.7%. Notably, this marks the first time since early 2022 that food prices have not outpaced overall inflation.

The Producer Price Index, which measures costs for finished goods that producers pay, saw a 0.5% increase for the month, as reported by the Labor Department in the week.

Later that day…

…data released by Stats SA showed a 2.5% year-on-year decline in mining production for August, following an upwardly revised 4.4% slump in July. This marked the second consecutive month of declining mining activity, attributed largely to reduced yields in diamonds, manganese ore, and other metallic minerals.

As the weekend approached, the Rand was hovering around the R19/$ mark and on track for a positive week.

Then in other news:

• The International Monetary Fund (IMF) revised down its growth projections for China and the eurozone, highlighting the persistent global challenges. Despite acknowledging the "remarkable strength" of the U.S. economy, the IMF expressed concerns about low and uneven global growth. The annual meetings of the IMF and World Bank in Marrakech were marked by the new risk emerging with the Israel-Palestinian conflict.

  Director Pierre-Olivier Gourinchas mentioned that various scenarios have not been explored yet, making it challenging to assess the situation at this point. The IMF is closely monitoring the conflict, noting a 4% rise in oil prices in recent days, reflecting concerns about potential disruptions in oil production or transport.

  The research by the IMF indicated that a 10% increase in oil prices could dampen global output by around 0.2% in the following year and boost global inflation by about 0.4%.

On Friday, the Rand was seemingly stabilizing after a week characterized by volatility and having taken back some welcomed ground, despite having given some back in the latter half of the week.

After opening the day at R19/$, the local unit traded sideways for the morning session before getting rather choppy in late trade, ending around the same level as the day begun...

And with that came the first green arrow of Q3!

The Week Ahead (16-20 October 2023)

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

• SA: Inflation Rate YoY (Sep), Retail Sales MoM (Aug)
• EU/UK: UK Unemployment Rate, UK Inflation Rate YoY (Sep)
• US: Retail Sales MoM (Sep), Fed Chair Powell Speech

We kick off the second half of October with inflation talk firmly in focus as local CPI results, and the comments from the Fed will take centre stage.

Can the Rand remain below R19/$? Is there any hope of a return to sub-R18 levels?

Well, our forecasting models seem to be giving us some hints, with certain levels that we are watching closely.

Until next week!

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To your success~

James Paynter

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