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

It’s been a busy start to Q3 for the local unit, which has seen sentiment shift to and from it over recent weeks while market participants ponder over the plans relating to ongoing monetary policy decisions, particularly in the US.

Last week was a thin one in terms of economic data but an important one for the local economy as headline consumer price inflation was shown to have returned to the SARBs target range.

However, Saffers will need to keep the bottles corked for the moment as Reserve Bank officials warned that there is still a long way to go until the thought of lowering rates is entertained.

A steady week for the Rand. Here’s what happened.

Key Moments (17-21 July 2023)

These were the major headlines over the last five days:

• SA Inflation - Stats SA’s results on Wednesday showed that inflation in South Africa had fallen to 5.4% year-on-year in June, bringing it back within the central bank’s target range of 3% - 6% for the first time in over a year.
• Local Rates - Following the inflation results, the South African Reserve Bank decided on Thursday to keep its interest rate steady at 8.25%, following 10 painful rate hikes since 2021.

After a week of strong gains the last time out (as predicted by our forecasting models), the Rand got underway at R18.13/$ on Monday, only marginally up from its previous close.

As we’ve seen over the last few weeks, the Rand’s trajectory has mainly been influenced by sentiment towards US monetary policies, and the greenback had a poor start to the week, losing ground to most counterparts.

The Rand briefly dipped below R18/$ by midday but was forced back as stage six loadshedding, among other local issues, quelled investor appetite...

On Tuesday, the dollar weakened again in early trade as market participants increased bets that the US Fed could be reaching the end of their rate hiking cycle…

…and the Rand gobbled up the ground and was trading in the mid R17.80s for most of the day.

While the improvement is a welcomed one, the Rand continues to face pressure due to fragile local economic growth, political uncertainties ahead of the 2024 election, and apprehensions regarding the future stability of state finances.

Additionally, financial market sentiment towards the Rand has, and will likely continue to be influenced by the upcoming BRICS summit and the potential visit of Russia's president…

…and not to mention the new concerns that have been raised in response to corruption allegations made against significant members of Deputy President Paul Mashatile's family, as reported in the week.

Nevertheless, the Rand remained below the psychological R18/$ mark on Wednesday morning as Saffers turned their attention to the incoming CPI results.

As it turned out, consumer inflation in South Africa fell to 5.4% in June, down from 6.3% in May, and back within the central bank's target range of 3% - 6%, marking the lowest reading since October 2021.

The statistical body added that the drop of 0.9% in the headline inflation figure between May and June was the biggest drop since May 2020.

Of the main categories that the CPI covers, six of the 12 saw a drop in annual inflation, one remained the same, while five categories increased.

Notably, annual goods inflation ticked down from 8% to 6.3%, and core inflation was also slightly lower at 5%.

While food and non-alcoholic beverage inflation also showed a significant drop from 11.9% to 11%, it still remains well outside the target range and continues to add pressure to household spending.

The news had little impact on the local unit, though the Rand still recorded a steady day, starting and ending at R17.88/$, with the all-important interest rate decision to come the following day.

On Thursday morning, the local unit opened up just below R17.90/$ and gained strongly in the morning trade session but slowed as a jobs report from the US showed that initial claims for state unemployment benefits dropped by 9000 up to mid-July.

Shortly after lunch, the South Africa Reserve Bank’s MPC announced its decision to hold interest rates steady for July off the back of easing inflation figures the day before.

Music to consumers' ears!

The SARB has been relentless in its rate-hiking activities since September 2021, raising the repo rate by a total of 475 basis points to date.

With the US Fed scheduled to deliver its monetary policy decision on July 26th, and with a 25 basis point increase being firmly expected, it remains a strong possibility that the SARB will find themselves forced into another hike(s) over the upcoming months.

As with previous statements, the Governor pointed out that without loadshedding, SA’s growth prospects would be a lot higher and that the prevailing energy crisis continues to weigh heavily on the economy and on future decisions.

He also added that the decision to hold was a very close call, with three members of the MPC opting to keep rates as is while two members preferred an increase of 25 basis points.

The Rand lost some ground following the announcement and was back within a hair of R18/$, but still in the green from last week as we headed into Friday.

But first, a quick look at some of the other headlines in the week:

• President Cyril Ramaphosa has provided confirmation that Russian President Vladimir Putin will not be present at the upcoming August BRICS Summit. In an announcement made by the office of the presidency on Thursday, it was stated that the decision for Putin's absence was reached "by mutual agreement." Instead, the Russian Federation will be represented by its Foreign Minister, Sergey Lavrov. Investors and market participants will continue to closely monitor the developments surrounding the Summit and its outcomes, especially surrounding the BRICS currency, as it can have significant implications for trade, investment, and geopolitical relations...
• According to data published by the US Census Bureau on Tuesday, retail sales in the US experienced a 0.2% increase on a monthly basis in June, reaching $689.5 billion. However, this reading fell short of market expectations, which anticipated a growth of 0.5%. Despite this, there was a positive revision of the May growth rate from 0.3% to 0.5%, providing a glimmer of optimism. Retail Sales Ex-Autos also rose by 0.2% in the same period. The US Census Bureau further added in its press release that total sales for April through June 2023 period were up 1.6%, about 0.4% up from the same period a year ago.
• China's economy expanded by 6.3% in the second quarter compared to the same period a year ago. However, this also fell short of what the market expected due to tepid export demand and declining property prices, which negatively affected consumer confidence. The National Bureau of Statistics reported that China's GDP in April-June showed a significant acceleration from the 4.5% growth recorded in the first three months of 2023.

After opening Friday at R17.88/$, some profit-taking in the early trade session resulted in a slight softening of the Rand, and the local unit broke back above R18/$ by mid-morning.

Still, the local currency has experienced a notable recovery in the last two weeks, currently down only 4% against the dollar compared to a year ago…

…while in contrast, at the beginning of June, it was significantly weaker, showing an over 20% decline from the previous year.

For now, though, sentiment is being driven by the recent data showing much cooler-than-expected inflation in the US and has seemingly raised doubts about the necessity for further rate increases…

…but as we know, that can all change in the blink of an eye.

After briefly rising to R18.06/$ by midday, the Rand took back ground through the afternoon and ended the week back below the R18/$ mark.

A small-ish but welcomed positive week.

The Week Ahead (24-28 July 2023)

Another big week expected. Here are the potential triggers we’ll be keeping an eye on:

• SA - Leading Business Cycle Indicator MoM (May), PPI YoY (Jun), Balance of Trade (Jun)
• EU/UK - ECB Interest Rate Decision, ECB Press Conference
• US - Fed Interest Rate Decision, Fed Press Conference

Where to next, you may ask?

Well, our forecasting models are predicting a few interesting patterns leading up to next week's monetary policy meeting by the Fed, which is almost certain to have a huge impact on investor sentiment…

…and could also be very profitable for those that are in the know.

Our model’s forecasts have been right on the money over the last few weeks, as we showed in our last couple of Rand Reviews, and if you’re interested in getting the inside scoop about the expected trajectory of the local unit ahead of time, then be sure to reach out to us, and we’d be glad to help.

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

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To your success~

James Paynter

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