Welcome to the Weekly Rand Review, your weekly update on the latest developments surrounding South Africa's currency.

In a relatively light week of local economic data, investor sentiment was poised to take cues from global events, with a particular focus on the United States.

The recent indication by the Federal Reserve that they plan to increase interest rates in an effort to bring inflation within its target range has sparked life back into the greenback, which caused a reaction from emerging currencies, including the Rand.

A slow but important week. Let’s get into it.

Key Moments (26-30 June 2023)

Over the weekend, new developments around the war between Russia and Ukraine dominated news headlines globally as reports suggested that Vladimir Putin was possibly facing a new challenge…
…but this time, it was from within his own ranks.

The PMC Wagner Group is a private army (private military corp) of mercenaries founded by Yevgeny Prigozhin, a long-time ally of President Vladimir Putin.

They have been influential in the ongoing war and have been the key group known for recruiting Russian prisoners and for being instrumental in the taking of the key city of Bakhmut after an extended and bloody battle.

Over the last few weeks (and months), Prigozhin has aired concerns mainly aimed at Russia’s defence minister Sergei Shoigu for incompetence and deliberately undersupplying his troops.

However, over the weekend, Prigozhin ordered his men to conduct a “march for justice” towards Moscow after reports emerged that he claimed the Russian military had attacked his soldiers...and things looked like they could turn nasty quickly, with Putin accusing them of mutiny and treason.

But just as things seemed to be escalating, Belarus President Alexander Lukashenko stepped in to de-escalate the situation (he is a long-time ally of Putin and has known Prigozhin for over two decades).

The end result:- Prigozhin halted his men, and he and those that were with him have been sent to Belarus (with all charges dropped); those from Wagner that did not join in the mutiny have been given contracts in the Russian military; and no changes have been made to Russian military leadership.

Which begs the question - was this an actual mutiny, that was quickly squashed?

Or was there some bigger military strategy (and psyop) in play here, which seemed to catch many off-guard (including most mainstream media), and resulted in Wagner troops ending up just a couple of hundred kilometres north of Kiev?

Certainly more at play here than meets the eye...

Well, although this seemed to get quickly resolved, it does raise questions whether Putin will still attend the BRICS summit later this year, which is something that added to the negative investor sentiment that led to the Rand almost breaching R20/$ last month. With most expecting that the Russian President may stay home for the foreseeable future, it helped trigger some positive sentiment toward the Rand in the early stages of the week.

At this point, this is just speculation.

But that is the very thing that drives markets, sentiment and speculation!

After opening at R18.72/$ on Monday, the local unit gained on the greenback through the first half of the week and was changing hands at just above R18.50/$ by Wednesday morning.

SA’s producer price index improved in May, according to Stats SA’s most recent blurp, down from 8.5% in April to 7.3% in May. This reading comes after a significant softening in consumer inflation for the same month, providing added hope that the cost of living crisis many have been facing may finally be easing.

However, SARB Governor Kganyago was quick to point out that policy will have to remain tight for a bit longer with inflation and wider risks still lingering.

Later that day, a local consumer confidence index showed a reading of -25, down from -23 in Q1, making the June-quarter reading the second-lowest on record since 1994.

According to Experian, the country’s default rate on accounts that have never defaulted in the past had surged to 22% in Q1 of 2023, underlining the struggles Saffers are enduring while also evidently stomping the outlook for the future.

Concerningly, the highest increase in defaults was on home loans (35%), which is widely regarded as one of the safest assets (generally the last bill that someone would miss a payment on compared to unsecured debt). Retail loan defaults went up by 30%, while personal loan defaults increased by 27%.

It’s all an intricate balancing game for SARB right now as maintaining elevated interest rates is clearly taking its toll on consumers, but they also need to maintain a healthy interest rate differential between local and US funds rates…

…which is something that investor sentiment weighs heavily on.

The US-SA interest rate differential has narrowed significantly since March last year and looks set to close even further after Federal Reserve Chairman Jerome Powell’s speech on Wednesday evening. The Fed boss reiterated in his address that more rate rises are likely while also leaving the possibility of a further increase in July firmly on the table.

Adding to the belief that there could be another interest rate hike at the 25-26 July meeting were strong labour market results, which showed that new claims for unemployment benefits fell by the most in 20 months.

The apparent strength in the US labour market is helping the economy defy recession by boosting wages (albeit that it may be due to people stretching themselves to the bone over more than one job). US GDP results were also positive, revised up to 2% from the original 1.3% for Q1, and along with the jobs data, it seems to be a perfect platform built for the Fed to pull the trigger at month-end.

By Thursday, the dollar climbed to a two-week high over most emerging currencies, including the Rand, which briefly shot to R18.88/$ before settling around the R18.80 mark.

As we usually do about this time, let’s take a quick look at some of the other major headlines from the week:

• The unemployment rate in the Eurozone was recorded at 6.5% in May, unchanged from the previous month, while in the larger EU territory, unemployment ticked dow to 5.9% from 6.0% a month earlier. Eurostat results showed that 12.9 million were unemployed, which was a reduction of 75,000 over the period.
• Gold prices dropped to its lowest level since the middle of March as a stronger greenback, and the hawkish comments from Jerome Powell weighed on the precious metal. The Fed’s remarks around higher rates played a part in diminishing the allure of gold which is now down to $1906 per ounce.

By Friday, expectations of more rate hikes by the US Fed continued to grow, with emerging currencies being forced to bear the brunt, and the local unit was no different.

The greenback chipped away at the local unit on Friday morning, and after briefly breaking above R19/$ by lunchtime, the Rand managed to pull some ground back before closing the week in the R18.90/$ region.

A big red arrow for the Rand this week, despite the late gains!

The Week Ahead (3-7 July 2023)

Into Q3 we go! Here’s what we’ll be keeping an eye on for the first week of July:

• SA - S&P Global PMI (June)
• EU/UK - EU PPI YoY (May), Retail Sales YoY (May)
• US - ISM Manufacturing and Services PMI (June), FOMC Minutes, Non Farm Payrolls (June)

With another thin week of local economic data expected, we will likely find our attention shift abroad, where each piece of data will likely sway sentiment to and from the local unit.

However, with three more weeks to go until the Fed’s next monetary policy decision and a few crucial data points expected between now and then, the Rand will likely remain very volatile.

Luckily, we have our forecasting modelling for exactly this purpose, and it has stood us in good stead again this week to keep us and our clients one step ahead.

Until next week, safe trading - and keep those emotions in check!

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

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