Welcome back to your favourite weekly Rand Review!

And it was an eventful week, to say the least.

As Janu-worry drew to a close, a raft of economic data (and market movement) was expected in the week, and that’s exactly what we got.

Most emerging markets lit up green in midweek on further signs of inflation receding in advanced economies and central bank’s monetary tightening policies seemingly starting to take effect (or was the inflation/interest rate cycle heading for a peak anyway?)

The local currency, which is susceptible to global forces, also benefitted, but only briefly, as local issues continued to undo any improvements made and dampen investor sentiment.

It was a topsy-turvy week for those with Rand exposures. Here’s how it played out.

Key Moments (30 Jan- 3 Feb 2023)

Here’s what made the headlines last week:

• Gloomy SA Data - Activity in South Africa’s private sector and the country’s trade surplus took significant knocks over December and January as intense power outages, among other factors, continue to drag on the local economy.
• European Inflation - The central banks in Europe and the UK released their most recent interest rate decisions in the week of 50 basis points each, with inflation receding further, but concerns gather over the longer-term growth trajectory.
• US Fed Downshifts - Following the two-day meeting of economic policy-makers in the US, the Fed has finally shifted to a less aggressive 25-basis point hike but maintains that there are more increases to come.
• US Labour Resilience - Despite high-profile layoffs expected in global tech industries, the US jobs market added a whopping 517,000 jobs in January, tearing up expectations of sub 200,000 job additions.

Emerging market currency traders will look back at January as a welcomed month of chalking up gains, as concerns of inflation and interest rates eased, following a brutal trading year plagued by uncertainty.

However, owing heavily to the power crisis locally, the Rand has largely missed out on this opportunity to capitalize on the weaker dollar, with traders taking a step back from placing big bets on the risky local currency.

And their decision is fully warranted, as this last week showed!

After another poor showing in the previous week, the Rand opened last Monday at R17.19/$ and followed up with a dismal morning session, breaching above R17.30/$ by mid-afternoon. With a slew of major local and international data releases due in the week, the trepidation on local trading floors continued overnight, with the local unit losing further ground as it pushed above R17.40/$.

On Tuesday, South Africa’s trade surplus figures were released, showing that it had more than halved in the year to December!

SARS revealed that the cumulative trade surplus was R193.38 billion for 2022, as compared to R431.74 billion a year earlier (but a surplus nevertheless).

Among the main contributing factors to the downturn were global trends that boosted the greenback last year, commodity market disruptions, global oil prices….

The country’s collapsing power utility continues to undersupply the nation and deter foreign investment, which has been clearly evident this year.

Stage six loadshedding was long considered a theoretical calculation until its sudden implementation in 2019, but its return (and frequency) this year has sparked a new debate. Reports in the week indicate that the ANC’s National Executive Committee (NEC) is now considering declaring a national state of disaster around load shedding.

As we learned during the national lockdown, such a declaration would give the executive government the ability to rule by decree without the need for consensus from Parliament…

…while control would rest largely with cooperative governance minister, who is none other than Nkosazana Dlamini Zuma!

And what is the actual agenda behind this move?
It’s not exactly clear what the government actually plans to do with this overarching, power since it’s already refused to give Eksom additional money to purchase diesel to operate emergency generators.

Perhaps the best-case scenario is a rolling back of the incoming 18.65% tariff increase?

But then one has to wonder what happens if Eskom does not receive the increase, which it is depending on in order to reduce the current rate of loadshedding?

It’s all a huge mess, and we’ll just have to wait and see how it plays out over the coming weeks. Firstly, as discussed last week - how about just reducing salaries?

To repeat, according to Eskom's March 2022 financials, employee costs had remained relatively stable at R33 billion, despite a reduction in headcount of 5.4% to 40 421 by year end...

In any private or public company, these salaries would have been slashed across the board - as well as significantly cutting back on a bloated staff complement, which the World Bank years ago estimated was 66% over-staffed.

The funding solution is a no-brainer if this was run as a business.
And about time it was!

The Rand, meanwhile, continued to wilt on Tuesday, reaching R17.49/$ before lunch, the highest level since mid-December.

Wednesday was set to be an eventful one with the eagerly anticipated monetary policy decision from the US, which would provide further clues on the trajectory of the world’s top economy. With a string of recent data suggesting that last year’s aggressive monetary tightening was starting to kick in, a 25 basis-point hike was the final decision announced by Jerome Powell.

Powell did go on to warn that the central bank still wants “substantially more evidence” before it can be comfortable with the path of inflation while also referencing the expected disinflation it expects in the economy. The most recent rate hike is the eighth since last year's hiking cycle began, taking the target range to between 4.5% - 4.75%, around 50 basis points away from the 5.1% projection for the year.

Despite the relatively “good news” of a 25 basis-point hike, there were a couple of other important data releases in the week from the US.

Manufacturing output contracted for a third consecutive month in January as interest rates weighed on demand for goods, dropping to 47.4 from 48.4 in December, the lowest since May 2020…

…while earlier in the week, data showed that consumer confidence also declined to 107.1 from 109.0 amid fears over the job market, business conditions, and the lingering threat of recession. Following the monetary policy announcement from the US, market optimism became clearly visible, especially among emerging markets, which kicked into gear on Wednesday evening.

The Rand led the way among 23 developing currencies, gobbling up more than 2% on the dollar, going from R17.40/$ before lunch to R17.07/$ by the close of trade and onward to just breach below R17/$ overnight.

With the big news from the US out the way, the focus turned to Europe, where the ECB and BoE were both preparing to deliver their verdicts on the current state of play and future expectations. Inflation in the Eurozone dropped for a third consecutive month to 8.5% in January from 9.2 in December, mainly owing to a significant fall in energy prices.

GDP results across the bloc also provided a pleasant surprise, growing by 0.1% in Q4 of 2022, beating forecasts of a 0.1% contraction, though it was lower than the 0.3% improvement in Q3.

These minor improvements were not enough to deter the ECB, though, who announced a 50-basis point increase and went on to indicate that there was likely one more increase on cards before it would re-evaluate its rate hiking pace.

Neighbors, the UK, followed suit as the BoE’s monetary policy committee voted 7 to 2 in favor of lifting the central bank's rate to 4% from 3.5%, marking its tenth consecutive monthly increase.

The Brits also hit a record 16.7% in grocery price inflation in January, which was an increase of 2.3% from the previous month.

On top of that, the IMF downgraded its forecast for the UK and expects it to be the only country among the G-7 nations that will shrink in 2023.

While economic forecasters are not always right when it comes to predicting the future, it is clear that the UK is staring down the barrel of a very difficult financial year…

…and it’s going to be very interesting to see if Rishi Sunak and Jeremy Hunt can live up to their goal of halving inflation this year.

After briefly dropping to the mid-R16.90s on Thursday afternoon, the local unit pushed back to the R17/$ psychological barrier and traded sideways for rest of the day, with one more crucial announcement expected on Friday…

…the US Non-farm Payrolls.

But first, in other news…

• The IMF has revised its projections, indicating that it expects China’s economy to grow by 5.2% in 2023, up from its 3% projection last year. The revision means that if China were to reach the projected figure, it would contribute a quarter of the global growth in 2023. However, the IMF also did mention the need for comprehensive macroeconomic policies and structural reforms to secure the recovery in China, with headwinds in the real-estate sector and a shrinking population threatening the optimal growth rate over the longer term.
• Cryptocurrency giant Bitcoin continued its incredible start to the year, posting its best January since 2013. On Thursday, the leader by market share surged back above $24,000 for the first time since August last year as investors reacted positively to the slowdown in the US Feds tightening trajectory. Smaller cryptocurrencies by market share and ultra-risky assets such as NFTs and meme stocks are also making a comeback after a 2022 best forgotten.

The local unit was little changed on Friday morning, opening just below R17.10/$ and edged up to R17.17 by midday as markets awaited the jobs reports from the US later that day…

…which turned out to be an absolute jaw-dropper!

The US jobs market headline figure revealed that a huge 517,000 jobs were added in January, blowing most predictions out of the water by a significant margin.

However, there are some signs that the labor market may still tighten in the coming months, with tech giants such as Amazon, Meta, and Google, among others, all confirming mass layoffs on the horizon. Nevertheless, the headline figures sparked yet another twist of events, providing a positive trigger for the US dollar, which jumped against most majors and emerging currencies…

….and in the blink of an eye, the local unit went from a week of possible gains to a loss, finishing the week around R17.45/$.

And another rollercoaster week ending in a dismal note for the Rand!

The Week Ahead (6-10 Feb 2023)

In a relatively thin week of data releases, here’s what we’ll be keeping an eye on over the next five days:

• SA - State of the Nation Address, Mining Production YoY (DEC)
• EU/UK - EU Retail Sales YoY (DEC), UK GDP YoY (DEC)
• US - Balance of Trade (DEC), Michigan Consumer Sentiment Prel (FEB)

With January having already come and gone, and most economies plotting and executing their routes of recovery after a difficult year, the local economy looks as though it’s in for another turbulent ride.

What should we expect from the Rand in February?

Simply put - plenty action...

Being exposed to Rand fluctuations has considerable risk in the current volatile climate, but thankfully, we have our Elliottwave-based forecasting model to give help us and our clients navigate the road ahead with clarity and confidence.

Until next week - enjoy the ride!

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.

Simply use the link below to get access now. No charge. No card. All yours to trial for 14 days.