And welcome back to your favourite Weekly Rand Review! We are grateful to have you with us as we explore the latest news, trends, and insights related to the South African Rand over the last seven days.

Last week was a shorter trading week, with many investors taking the long weekend off due to the bank holiday in several countries on Monday

In a thin week of local economic data, the Rand’s direction was likely to be dictated by global factors and resulting sentiment…

…chief among which would be the US monetary policy decision scheduled for the second half of the week, where the Fed was expected to provide an update on their plans for the foreseeable future.

Local investors were also keeping one eye on the S&P Global PMI survey later in the week to gauge the health of the economy and the local business outlook…

…though, in the wake of power cuts, input shortages, and a barrage of geopolitical snafus that have repeatedly painted SA in a bad light, the expectations were understandably muted.

A testing week. Here’s a recap of how it unfolded.

Key Moments (1-5 May 2023)

In a week of light economic data, here’s what captured the headlines:

• SA S&P Global PMI - South Africa’s Purchasing Managers’ Index fell in April, further underlining the struggles that local businesses are feeling, with several headwinds driving a solid drop in output.
• US Rate Decision - The US Fed was set to undergo their two-day monetary policy meeting in the week, with most onlookers expecting a 25 basis-point hike, though the greater focus would be around their plans to (potentially) pause rate increases after May.
• Banking Fears Resurface - As concerns over possible banking contagion last month just began to dim, another high-profile failure in the sector in the week has brought with it a new bought of fear that has left jittery investors asking, “Who’s next?”
• Eurozone Inflation Up - Inflation across the 20 countries that share Europe’s common currency edged upward to 7.0% in April, reversing a five-month period of consecutive declines.

After a week of losses last time out, the Rand got going at R18.28/$ on Monday morning in a week where global factors were expected to take center stage.

Eskom played their usual role in adding early-week pressure to the local unit, announcing stage 6 loadshedding for the remainder of the week…

…and with investors still with their feet in the sand for the bank holiday, the Rand was quickly on its way up to R18.40 by midday, setting a poor tone for the week to come.

While many banks’ doors were closed for the holiday, US bank First Republic found themselves closing their doors for good as regulators announced the seizure of a US banking giant!

First Republic Bank is now the third of its kind to fail in under two months, while the only bigger failure than this was the collapse of Washington Mutual, which imploded at the peak of the 2008 financial crisis.

The regulators proceeded to sell all of the bank’s deposits and most of its assets to JP Morgan Chase in an attempt to calm investors as questions about the health of the US banking system began to fly.

US authorities were at pains to try and quell the anxiety and assure the markets, with even Biden weighing in to say that the actions would "make sure that the banking system is safe and sound."

Very brave words, but the market isn't that gullible, as can be seen by the KBW 'Big Bank' Index below, which clearly shows that the banking sector has been in trouble for some time, having lost more than half its value since its high of last year...

...and has been in freefall the last few weeks

...with no end in sight!.

The big risk here is firstly, how much these banks are over-leveraged, and secondly how interconnected they are, so that all it needs is for there to be a run on some banks for the whole pack of cards to come down, which can even affect some relatively healthy ones.

And then, there is also the question about the size of JP Morgan Chase following this acquisition, as the country’s biggest bank has now been permitted to get even bigger.

To put this into perspective, JP Morgan is so big that by law, they would not have been able to buy First Republic since no single bank is allowed to hold more than 10% market share of deposits in the US…

…it’s only due to First Republic collapsing (and government intervention) that JP Morgan Chase was allowed to complete the transaction.

JP Morgan Chase will now have well over $3 trillion in assets, and while some may feel uncomfortable with a single institution being given that much responsibility, it has been dubbed by many policymakers and economists as “too big to fail.”

We have heard that one before!

This one is not over yet - by a long shot!

Nevertheless, all the banking jitters contributed to pushing the dollar backward against most emerging currencies, but the Rand was little changed and traded in the R18.40/$ region through Tuesday.

The Rand advanced in Wednesday's early trade as a gloomy jobs report pushed the greenback onto the defensive ahead of the interest rate announcement due later in the day.

US March report showed that job openings in the US dropped for a third successive month to 9.59 million, while layoffs increased to the highest in more than two years.

The strength in the labour market has been seen as a key factor driving the US Fed’s decision to continue its aggressive monetary tightening trajectory in recent times…

…but with signs of softening now starting to show, it adds to the speculation of a potential pause in rate hikes in the near future.

Shortly after, the Fed took to the stage and announced a 25 basis-point increase in May, taking the benchmark funds rate to 5.0% - 5.25%.

However, in its official statement, the US central bank appeared to soften its language relating to future rate increases by omitting a key line about “additional policy firming”, which has been an ever-present since the start of the current hiking cycle.

The dollar took a blow against its counterparts following the decision by the Fed, and this time the Rand was not to be left behind, dropping from the mid R18.40s to R18.25/$ by the close of play on Wednesday.

On Thursday, the most notable piece of local data for the week came in the form of the SA S&P Global Purchasing Managers’ Index, which made for grim reading for local businesses…

…as the index showed a fall to 49.6 in April from 49.7 a month earlier. A reading above 50.0 shows growth.

The contraction was mainly attributable to capacity constraints from loadshedding and supply shortages, while inflationary pressures led to drops in purchasing and employment.

This is just the latest in an assortment of warning signs indicating that local businesses and the economy as a whole are in for stormy conditions on the horizon.

South Africa has been bombarded with issues that have deteriorated the outlook of dealing with the country. Here’s just a reminder of some of these:

• Poor GDP results and future projections
• Corruption allegations at the state power utility
• Greylisting by the Financial Action Task Force
• S&P’s downgrading of the country’s credit rating
• A disappointing cabinet reshuffle (that actually increased the size of the cabinet)
• President Ramaphosa announcing SA’s withdrawal from the International Criminal Court last week

And all the while, the country is forced to bear the global shame of power outages multiple times per day - devastating business productivity and investor appetite…

…while also coming under pressure due to its evidently growing friendship with Russia.

Last week, it was revealed that the national government had sanctioned a Russian military aircraft to land discretely at the Waterkloof Air Force Base, and when questioned, the government responded that the aircraft was delivering diplomatic mail to the Russian Embassy.

Let’s just hope that’s all it was!

Being involved in an ongoing war is the last thing Saffers need!

With no major economic data due for the rest of the day, the Rand held on to it’s minor gains and closed out Thursday at R18.28/$.

As we usually do before we wrap up the week's events, let’s take a look at some of the other headlines that caught our attention:

• The Eurozone received an unwanted surprise as consumer prices ticked upward in March to 7.0% from 6.9% a month earlier. The uptick sealed the deal for the ECB, who responded by increasing its benchmark interest rate by 25 basis points, now up to 3.25%, marking a level not seen since November 2008. Prices for food added the bulk of the increase, rising by 13.6% on the year, while energy prices showed a slight improvement over the same period.
• In light of the US Fed’s decision to raise interest rates combined with renewed fears in the banking sector, Gold received a notable boost as investors piled into the precious metal as a safe haven from the tumultuous currency market. The commodity rose above the psychological barrier of $2000 per ounce, while in Rand terms, the metal reached a record-high of R37,500 per ounce by Thursday evening.
• The Russia/Ukraine conflict took a new turn mid-week with a thwarted drone attack on the Kremlin, sparking claims of an assassination attempt on Putin and counterclaims of it being a Russian 'false flag' event. Whether we ever find out the truth is questionable, but either way, it has significantly upped the tensions and rhetoric in this drawn-out conflict.

On Friday morning, the Rand lost ground as investors continued to back safer assets with contagion fears still dictating their short-term moves...

...and continued to bleed as labour market results from the US showed that non-farm payrolls rose by 253,000 in April, way above the 179,000 expectation, but March got adjusted significantly from 236,000 to 165,000.

Within moments of the payroll results, the local unit shot back up and petered out the week around R18.40/$.

Another week, and again, a disappointing one for the local unit.

The Week Ahead (1-5 May 2023)

A busy week incoming, here’s what we’ll be focusing on over the next five days.

• SA - SACCI Business Confidence (Apr), Mining Production YoY (Mar), Manufacturing Production YoY (Mar)
• EU/UK - BoE Interest Rate Decision, UK GDP YoY (Mar)
• US - Inflation Rate (Apr), PPI MoM

Following the US Fed’s decision to increase rates again this month, bets on a similar move from the South African Reserve Bank have been significantly increased…

…as they remain steadfast in their goal of bringing inflation within the target range of 3 - 6% while also trying to keep pace with the interest rates abroad.

And, while banking sector concerns remain at the forefront of investors' thinking, the Rand could find itself becoming a casualty of a nervous and volatile market.

Luckily for us, our Rand forecasting models are on hand to help us make smarter decisions and achieve better results.

And that's a wrap of this week's Weekly Rand Review! We hope you enjoyed reading it as much as we enjoyed writing it, and we can't wait to share more with you next week.

See you then!

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James Paynter

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