Welcome back to the Weekly Rand Review, your trusted source for navigating the dynamic landscape of South Africa's currency.

Last week we witnessed the intricate dance of the Rand against a changing global economic backdrop.

The local unit experienced a notable setback against the greenback over the past week and was pushed back above the psychological threshold of R19/$, R21/€ and R24/£.

This movement, while concerning for investors and market observers, is far from a result of any single isolated event…

…instead, it is the culmination of a myriad of factors, both at home and abroad, that have woven a narrative of uncertainty around the local unit.

Battered by concerns over the state of a crucial economy in the East and further interest rate pressure from the biggest economy in the West, the Rand could not catch a break last week.

Let’s get into the details!

Key Moments (14-18 Aug 2023)

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

• SA Retail Sales - Stats SA released its results on the all-important retail sales results for the year, which declined again in June, marking the seventh consecutive month of contraction.
• China Woes Deepen - A week to forget for China, with poor economic data sparking a surprise rate cut, followed by Country Gardens default concerns, and then Evegrande filing for bankruptcy.
• FOMC Minutes - The most recent minutes revealed that while certain members were inclined to maintain the interest rate pause initiated in June, the broader sentiment is that that inflation remains a concern. Further interest rate hikes are far from out of the question...!

In the realm of currency trading, the Rand experienced a notable setback against the dollar over the past week. After flirting with the R19/$ mark the previous week, the local unit entered last week firmly on the back foot and was already above the key psychological barrier by the first trade on Monday morning.

It was already shaping up to be a tough week!

Among the sentiment shapers were renewed concerns regarding the stability of the US banking sector, coupled with additional signs indicating a sluggish recovery in China.

Yet, as we know, you cannot always assume that logic will work! The Rand has shown time and time again, it defies traditional thinking - as do all markets.

But this time, by SA close, the local currency saw an over 1% depreciation, reaching R19.14 against the US dollar, marking its lowest point since early June.

On Tuesday, the Rand experienced another decline following a surprise move by China's central bank to reduce key policy rates, which is aimed at boosting economic recovery in South Africa's largest trading partner.

Anticipated delays in China's economic recovery are projected to lead to a decline in industrial metal prices as the nation holds the status of the world's largest commodities importer.

This, in turn, is bound to affect the export momentum of South Africa and consequently impact the trajectory of the Rand exchange rate.

But it wasn't just this that spooked the market, as reports revealed that Chinese property giant Country Garden was in trouble. The company missed two interest payments, and was on the brink of default, facing billions of Dollars in losses...

...remember a similar situation with another Chinese behemoth Evergrande just two years ago?

There is more to come on this one...

The move saw market sentiment swayed with a combination of fear and uncertainty, prompting investors to divest from riskier assets and seek refuge in the safety of the US dollar. As a result, the local unit was pushed to the R19.30/$ region before lunch. Local data had little to no impact on sentiment, with the Rand seeming like a mere passenger in the market movement early in the week.

By midweek, Statistics South Africa data showed the country's retail sales fell 0.9% year on year in June after declining by 1.6% in May and have contracted in annual terms every month since December 2022, with rolling power blackouts playing as a major contributing factor.

Among the seven categories assessed by Stats SA, five experienced a decrease in volumes on an annual basis…

…with the most notable decline occurring in the general dealer's category, which dropped by 2.7% year-on-year, contributing a negative impact of 1.2 percentage points.

The stats agency also revealed that in Q2, the official unemployment rate of the country experienced a slight decrease to 32.6%, marking its lowest point since the first quarter of 2021.

During this period, the count of individuals without jobs decreased by 11,000 to reach 7.9 million.

The count of individuals who were not participating in the economy due to reasons other than discouragement increased by 93,000 to a total of 13.3 million…

…conversely, the number of discouraged job seekers decreased by 94,000 when comparing Q2 2023 to Q1, leading to an overall reduction of 1,000 individuals in the category of not economically active.

On Thursday, the Rand displayed strength against the dollar following data that indicated the country's business confidence had retained its relatively steady state.

The SACCI business confidence report indicated a slight decrease from June but still maintained stability, suggesting no significant alteration in the business outlook. Prior to its increase in June, the index saw a continuous decline from January to May, which was influenced by factors such as extensive power outages, escalating interest rates, and diminished trade volumes, among other considerations.

The Rand briefly dipped below R19/$ after the report was published but encountered another setback, in fact two...

The recently disclosed minutes from the Federal Open Market Committee's meeting held on July 25-26 revealed a division among officials regarding the continuation of the interest rate hike pause observed in June. While certain members were inclined to sustain the pause, the majority maintained a concern about inflation, considering it a significant threat…

…consequently, these members expressed a willingness to further increase rates as a corrective measure.

The Federal Reserve, in its July session, lifted its short-term benchmark Fed funds rate by a quarter percentage point, setting a target range of 5.25% to 5.50% - its highest level in over two decades.

In July, Chairman Jerome Powell indicated that there are two plausible scenarios for the September meeting: either the rates could be raised once again, or they could be maintained at their current level. For now, market participants seem to be favouring the former outcome, yet the Federal Reserve's course of action remains uncertain…

…and as we have seen in recent weeks, the US dollar has largely been bolstered by uncertainties related to the peak of US policy rates and increasing optimism about a gentle slowdown in the US economy.

But the real shocker of the day was that Chinese property giant Evergrande had filed for bankruptcy - two years after initially defaulting, sparking more fear of global contagion into an already jittery market - and rightly so...

...is this a Lehman Brothers moment, heralding a financial meltdown?

It's certainly starting to look that way - who is next?

That said, one would have expected the Rand to weaken, but instead it strengthened as the day progressed breaking back below R19.10 by the close of play on Thursday...

...once again conventional wisdom not helping to give direction.

Before we continue, let’s take a quick look at some of the other major news headlines of the week:

• The development bank established by the BRICS nations concluded the auction for its inaugural South African Rand bonds on Tuesday. This move comes as the institution faces increasing pressure to enhance its fundraising and lending efforts denominated in the local currency.
  
  The New Development Bank (NDB) presented two bond offerings: a five-year note valued at R1 billion ($52.3 million) and a three-year note valued at R500 million. The auction reportedly garnered substantial interest, with a total of R2.67 billion in bids.
• In Britain, the Office for National Statistics reported that the Consumer Prices Index displayed an annual increase of 6.8%, marking a decrease from the 7.9% recorded in June; however, despite the Bank of England implementing a series of interest rate hikes in succession to address the situation, the UK's inflation has remained the highest among G7 nations for several months. While there was a decrease in gas and electricity costs during July, food prices continued to rise, albeit at a slower pace compared to the same period in the previous year.

Some may argue that the Rand is merely following a seasonal trajectory, where the summer holidays in the Northern Hemisphere sees market players vacating their desks and tending to be more risk-averse during this period.

But last week, the Rand had been significantly affected by apprehensions regarding the worldwide economic perspective…

…which is particularly impactful for a small, open commodity-exporting nation like South Africa.

After opening at R19.05/$ on Friday, the Rand slipped above R19.10/$ before falling back below R19/$.

The Week Ahead (21-24 Aug 2023)

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

• SA BRICS Summit, Inflation Rate YoY (Jul)
• EU/UK Public Sector Net Borrowing (July)
• US Jackson Hole Symposium, Fed Chair Powell Speech

As we enter the second half of Q3, it’s fair to say the Rand is under major pressure at this moment, but as we know, just as it starts to seem like the worst, the market is often on the verge of a reversal…

…which could be very profitable for those willing to hedge dynamically.

That’s where our sentiment-based forecasts have been thriving of late and the most recent prediction sent on Friday, August 18th, showed significant action expected in the upcoming weeks...

...especially with the BRICS summit and Jackson Hole Symposium set to get underway new week.

If you would like to know more, simply reach out, and we’ll do the rest.

Until next week...

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.

If you have any questions or feedback, please leave them below.

To your success~

James Paynter

P.S. Enjoyed this Weekly Rand Review? Click here to get our Weekly Rand Review in your inbox every Monday