Welcome to this week's edition of the Rand Review.

As the week unfolded, the South African Rand navigated through a mix of influences, experiencing a relatively quiet first half...

...before a surge of activity in the last stages of the week.

The local landscape saw notable developments, with Finance Minister Enoch Godongwana delivering the mid-term budget speech, shaping expectations for economic policies ahead. However, the Rand's gyrations remain deeply entwined with global events, particularly the shifting dynamics of the US dollar.

In a notable turn, the mighty greenback, after what felt like a never-ending period of gains, began to show signs of weakening…

… and the change in sentiment had a palpable impact on emerging market currencies, including the Rand, as they responded to the evolving global risk landscape.

A big week - here’s how it unfolded.

Key Moments (30 Oct - 3 Nov 2023)

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

• Mid-term Budget - Finance Minister Enoch Godongwana's earlier cautions about the necessity for government austerity and budget reductions due to lower-than-expected revenues were substantiated this week as he presented a restrained mid-term budget speech.
• US Interest Rate - On Wednesday, the Federal Reserve opted to maintain interest rates unchanged, still grappling with the challenge of gauging whether prevailing financial conditions are already sufficiently restrictive to manage inflation.
• US Non-farm Payrolls - On Friday, we had the the big mover for the month - and it didn't disappoint, even if the numbers did, falling short of expectations.

After a week that ended with the Rand's big comeback, the local currency started the week at R18.82/$, with several important data releases - and therefore triggers - to come in the week. Most of those, though, were scheduled for the second half of the week, which saw the Rand trade mainly sideways until midweek...

...almost as if it was just soaking up the Boks' World Cup victory.

The first signs of significant movement came on Tuesday evening ahead of the eagerly awaited mid-term budget speech, with the local unit strengthening below R18.70/$...

…though expectations of the budget were candid.

Quite simply: it was a grim overview of a struggling economy...

One which was battling with the dual impact of:

• Abysmally managed government spending
• Way less than expected tax revenues.

And those expectations were largely met as it was revealed that the government had missed its revenue target by R57 billion! In addition, prospects for imminent improvements in revenue collection remain bleak, with anticipated revenue shortfalls reaching an estimated R54 billion in 2024…

…and escalating to nearly R68 billion in the concluding year of the medium-term framework.

Among the notable points from the Minister’s speech were:

• Tax collections from companies recorded a significant decline, amounting to R35.8 billion, reflecting a 10.65% decrease from the projected R336 billion outlined in February.
• Additional factors impacting revenue collections included a notable rise in VAT refunds amounting to R22 billion compared to the corresponding period last year.
• Factors contributing to the alarming growth in debt include: the expanded public sector wage bill due to the recent wage settlement - and the allocation of funds amounting to R33.6 billion for the extension of the pandemic social relief of distress grant into 2024.
• There will be continuous provisions for this grant. While no policy decision has been made regarding the funding of the relief grant, the government has included a provisional allocation for "social protection" amounting to R35 billion in 2025-26 (sounds like trying to ensure future votes to me...)
• A total of over R946 billion will be allocated for social protection transfers, covering various grants such as the old age grant, child support grant, disability grant, and the CV‐19 social relief of distress grant.

The Minister also forewarned of measures to generate an additional R15 billion in taxes from an already strained taxpayer base…

…however, he did not disclose specific details about where this additional tax revenue would be sourced, with taxpayers expected to receive more information in the February budget.

To fund its spending plans, the government intends to borrow an average of R554 billion annually over the next three years. These funds will be allocated to bridge the gap between government spending and revenue collection, refinance existing debt, and offer debt relief to the state power utility.

Bottom line?

The increased borrowing will result in reduced funds for other programs, with the cost of servicing debt now exceeding that of basic education, social protection, or health, as highlighted by the Finance Minister.

Crazy stats!

Analyzing the budget projections reveals a stark reality: for every R1 the government spends, 22 cents is allocated to debt servicing!

This marks a significant increase from just seven cents in 2009.

Yet, despite this threefold rise in costs over the past 15 years, there is minimal tangible impact or progress to show for it. What we have now is a situation where the debt is exceptionally high, yet we lack the corresponding investment…

…as we still need to make essential investments in the energy sector, transport, logistics, and water.

This is the issue - government has failed to utilize or manage the surge in debt!

The budget details did little to influence the Rand, but later that day, we did get some movement after the Fed's announcement of maintaining unchanged interest rates…

…which weakened the dollar, with most investors interpreting it as a signal that the US central bank might have come to an end of its rate hikes.

Fed Chair Jerome Powell highlighted the complexity of the situation, expressing the central bank's readiness to raise rates if inflation progress stalls.

However, officials are cautious about the potential impact of rising market-based interest rates on the economy (about time!) and aim to avoid unnecessary disruption to the ongoing trends of steady job and wage growth. Powell also recognized the potential impact of the recent market-driven increase in Treasury bond yields, home mortgage rates, and other financing costs on the economy…

…and mentioned that officials will closely monitor these effects as part of their considerations on whether to proceed with another hike in the central bank's policy rate.

Following the US rate decision, sentiment improved further toward riskier assets, and the Rand received a notable bump in the right direction, improving to R18.50/$ by Thursday morning. And the local unit continued to gain during the day as investor appetite continued to improve to hit R18.31/$ (its best level in 2 months) before retracing somewhat...

…ahead of the final major data release of the week in the form of US jobs figures.

Then in other news:

• The Bank of England, facing the challenge of combating the highest inflation among major economies, maintained its interest rates at a 15-year peak. Despite acknowledging a near-recession and projecting limited growth in the upcoming years, the Bank emphasized its commitment to keeping borrowing costs elevated. The Monetary Policy Committee voted 6-3 to keep the Bank Rate at 5.25%, aligning with its decision in September after a series of consecutive increases.
• South Africa, despite making strides in addressing global anti-money laundering standards, has fallen short in investigating and prosecuting money laundering and terror financing cases. Finance Minister Enoch Godongwana revealed this information, indicating that the country will remain on the Financial Action Task Force's (FATF) grey list until at least 2025. The update was part of the government's efforts to combat crime and corruption, presented during the Medium-Term Budget Policy Statement (MTBPS) on Wednesday.

As Friday rolled in, all eyes were on the Non-farm Payroll and unemployment figures from the US. And when the news hit, the US economy experienced a slowdown in job creation in October, with non-farm payrolls increasing by 150,000, below expectations of 170,000.

The impact of United Auto Workers strikes were reported to have played a significant role, resulting in a notable loss of jobs in the manufacturing industry. In addition, the unemployment rate increased to 3.9%, marking the highest level since January 2022.

The October slowdown reinforced the belief that the Fed would dial back on its aggressive method of containing inflation…

…and emerging markets, after what has felt like a lifetime, were able to bask in the sunshine.

After opening the day just above R18.40/$, the Rand improved to the mid R18.20s and saw out the week at its lowest level in three months!

A big green arrow!

The Week Ahead (6-10 November 2023)

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

• SA Mining and Manufacturing Production YoY (Sep)
• EU/UKEU PPI YoY (Sep), UK DGP YoY (Sep)
• US Balance of Trade (Sep)

What a start to November!

Not only did the Springboks make the country go wild, but it was a profitable start to the month for our subscribers as well, with our Elliottwave-based forecasting system providing clients with this view the week before - with downward bias, confirmation level - and target. Bang on the money yet again.

(Click to enlarge)

Did this move catch you out? I trust not, because it should not have with this kind of info.

Remember, you can get access to all our reports and predictions using the link below.

Until next week - safe trading!

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To your success~

James Paynter

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