Welcome back to your favourite Weekly Rand Review…

…and sjoe - what a week it was!

If you’ve ever wondered how much of an impact government can have on a currency’s performance in the short term, then this week’s episode is for you.

Last week could go down in history for all the wrong reasons for Saffers, as new revelations around the growing relationship between Russia and South Africa spearheaded the local unit’s demise.

The Rand’s latest battering comes amid intensifying fears over the ongoing power crisis being set to worsen and whispers of grid collapse and total blackouts becoming a little louder.

Everything that could go wrong last week, did!

Here’s how the week unravelled.

Key Moments (8-12 May 2023)

These were the major events from last week.

• New Record Highs - The Rand pummelled past R19/$ on Thursday afternoon as political tensions continue to grow, while record-level power cuts cause investors to shy away from the risky local unit.
• Local Manufacturing Down - Load shedding and high inflation took their toll on the important local manufacturing results as the sector experienced a notable decrease in production in Q1.”
• US Inflation Edges Down - Headline inflation in the world's top economy continued to cool on a yearly basis but edged up on the month, while producer prices also cooled over the same period.

After another poor week last time out, the local unit opened Monday trade at R18.38/$ and traded steadily through the day with no major economic data points expected in the first half of the week.

BUT, the wheels started to come off on Tuesday evening as the local unit began its first ascent for the week, with talks around a possible total grid collapse and complete blackouts becoming more frequent among the chattering classes.

By Wednesday morning, the Rand had broken above R18.60/$ ahead of the local manufacturing and crucial US inflation results due later in the day.

Stats SA released mining and manufacturing figures for March showing that mining production and sales slowed by 2.6% in March 2023 versus a year ago but increased by 1% in Q1 compared to the 3.4% dip in Q4 last year.

Manufacturing production also decreased by 1.1% year-on-year in March, with petroleum, chemicals, and plastic products adding the bulk of the negative contribution.

Shortly after those poor local data results, the US Consumer Price Inflation results were released, showing that headline inflation in the world’s largest economy edged lower to 4.9% from 5% a month earlier…

…while core annual inflation also ticked down to 5.6% from 5.5%.

The Producer Price Index in the US also showed improvement, rising 2.3% in the year to April, down from the 2.7% increase recorded in March.

However, on a monthly basis, both consumer prices and core prices were up 0.4% between March and April, and in terms of the latter, it represents the fifth consecutive increase.

While there are signs of improvement in the headline inflation rate, it is still well above the Fed’s target range…

…and following their decision to increase rates by 25 basis points last week, this marks the first time since the 'pandemic' that the central bank’s rate is higher than the official inflation rate.

The Rand was pushed back further following th US CPI results and was changing hands at a shade below R18.90/$, already over 1.4% down for the week and 12% since the start of the year.

None of that, though, would prepare us for what was about to come.

They say a picture is worth a thousand words. Here’s a perfect example if you haven’t already seen it.

Yes, that’s the front page of the Financial Times international edition! Just one of many global news outlets that have been covering the newest threat to the local economy - the SA government!

On Thursday, the US ambassador to South Africa, Reuben Brigety, made a gobsmacking allegation that South Africa was involved in supplying guns and ammunition to a Russian ship that docked in Simon’s Town Naval base in December last year!

In his address to journalists, when questioned as to whether he was certain this was the case, the US Ambassador replied in seven simple words: “I would bet my life on it.”

Queue the mayhem!

In what is already being referred to as the South African arms-to-Russia scandal, the local unit was sent into freefall, smashing through the crucial R19/$ psychological barrier and surging onward to R19.34/$ by mid-afternoon.

It wasn’t just the dollar that the local unit was bleeding against, the Rand came within a whisker of an all-time low to the pound as well, pushing past R24/£ before day’s end.

But wait, there’s more!

Fears are now being raised that the US may take economic action against South Africa, potentially by scrapping the duty-free export benefits it receives as part of the African Growth and Opportunities Act (AGOA).

Reality check - If the US sanctions SA in this way, it would put trade of as much as R400 billion at risk!

So, here’s a question - What would any rational person do if something goes horribly wrong?

Simple enough. You take action, right?

It really isn’t rocket science. The longer you leave a bad situation, the worse it gets. Swift action is essential because any sort of delay could increase the damage immeasurably.

But this isn’t the case in the South African government, as last week showed.

An accusation of this magnitude warrants immediate attention, and you would expect the leaders of the country to spring into action and respond with a definitive statement, either denying the allegation or saying that it was unaware of the transaction…

…or, at worst, admitting that it is aware and is willing to deal with the consequences.

Right?

Well, not in SA. Instead, hours passed in silence until the initial response was released, and not by the president in person, but by his spokesperson, Vincent Magwenya, via Twitter, stating that “The Presidency has noted the reported remarks attributed to the US Ambassador, and we will respond in due course.”

Ramaphosa eventually did take questions in Parliament, and when asked about the situation initially, his response was similarly laid back, saying: “In time, the matter will be discussed.”

What was the impact of the time taken between the US Ambassador’s comment and the (non) response from the leading party, you ask?

Well, the Rand went from R18.90/$ to R19.32/$ between midday and 3pm, a new three-year record!

The Rand has already been massively underperforming relative to its emerging market counterparts this year as a cloud of negativity continues to hover over the country.

A sad sight indeed!

Earlier in the week, SARB governor Lesetja Kganyago warned that load shedding will reduce economic growth by 2% in 2023, bringing his revised estimation to a meager 0.2% growth for this year…

…and while the central bank continues to insist that aggressive hikes will help tame inflation, perhaps the more honest reality is that local interest rates need to remain competitive to protect the already beleaguered local unit.

With the Fed raising rates again last week, the differential between US and SA rates has shrunk again, and local rates are starting to lose their shine for investors…

…which is compounded by the growing risk about the country’s economic outlook.

Against this backdrop, there seems to be little alternative for the Reserve Bank but to keep pulling the trigger on rates as they did with the unexpected 50-basis point increase in March.

After a calamitous afternoon trading session, the Rand settled below R19.20/$ but was still under immense pressure ahead of what was expected to be a busy close to the week.

But before we get to that, let’s take a quick look at some of the other headlines from around the globe:

• The Bank of England lifted its key interest rate again on Thursday, marking its highest level since the 2008 financial meltdown, while noting that inflation remained stubbornly high but that it was confident the Brit economy would avoid recession this year. The latest 25-basis point hike is the 12th consecutive increase from the BoE and takes the headline interest rate in the UK to 4.5% as inflation remains stuck above 10%.
• The BRICS group of nations is set to discuss the feasibility of introducing a common currency at the summit of the bloc’s leaders scheduled for later in the year. US interest rates and geopolitical tensions have upped the value of the dollar to the detriment of many emerging markets, and the argument from the BRICS nations over why they they cannot use their own currency to trade is seemingly gathering attention and adding another layer to the concerns over the extent of the ties between the nations involved.

As the news of South Africa’s alleged weapons and ammunition transaction spread globally overnight, the local unit found itself on the back foot again on Friday morning and briefly broke above R19.50/$ before lunch!

Investor sentiment towards the Rand is hanging by a thread, and with a worsening power supply outlook, the Rand is likely to remain under pressure in the short term - but how much worse could sentiment get?

We’re going to need to see the government provide a detailed plan to stop the electricity crisis (that investors buy into) and work themselves out of the geopolitical corner they are in before any sustained improvement can be made.

Until then, underperformance will persist as we saw last week, with the local unit taking another big red arrow to end in the mid-R19.20s.

A terrible end to a forgettable week saw SA's Foreign Ministry summoning the US Ambassador over his allegations... it would seem that the government is not backing down on this at all, but rather doubling down.

Expect this to continue to bubble over next week...

...and that was the wrap!

The Week Ahead (15-19 May 2023)

In a relatively thin week of economic date, here’s what we’ll be keeping an eye on next week:

• SA - Retail Sales YoY (Mar), Unemployment Rate (Q1)
• EU/UK - UK Unemployment Rate (Mar), EU Core Inflation Rate Final (Apr)
• US - Retail Sales MoM (Apr), Fed Chair Powell Speech

Even before the Russian arms allegations, the Rand was bleeding due to the ongoing concerns about the economic impact of loadshedding and being greylisted…

…and with no solid end or solution in sight for such issues, the local unit is in for a rollercoaster ride over the upcoming weeks.

Predicting the Rand’s trajectory is as volatile as we’ve seen it for a long while, and it’s at times like this when we look to our forecasting models to lend us a helping hand.

Don’t forget to check them out.

Be sure to come back next week, and until then, safe trading!

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To your success~

James Paynter

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