It’s that time of the week again - Welcome back to your favourite weekly Rand Review!

And boy, was it a tough week for the local unit!

For years now, Saffers have been punished by volatile local market conditions and a poor-performing economy that isn’t even growing fast enough to slow unemployment, which is on the brink of a record high.

As a result, the local economy has become dependent on external markets and is forced to take its cues from global drivers…

…in fact, the current higher-than-normal local inflation rate has very little to do with what’s happening in SA.

Last week was another clear illustration of this as we watched the local unit wilt to its lowest level in over three months with no solid reasoning to back a possible u-turn anytime soon.

Local unit backers couldn’t wait to turn the page on a nightmarish week for the Rand…

…here’s how it unravelled.

Key Moments (13-17 Feb 2023)

Here’s what made the headlines in the last week:

• SA Inflation Slows - Stats SA released its most recent results showing that headline consumer inflation slowed down for a third consecutive month, but food price inflation headed in the opposite direction.
• Retail Sales Fall - Rolling blackouts and price pressures continue to weigh on the country’s retail sector and overall business confidence, with both areas posting drops in December.
• US CPI and PPI - The world’s top economy showed further signs of picking up as consumer and producer price indexes both declined in January while retail sales also rebounded.

Last month, most emerging markets rallied on hopes that the US Fed would slow down or even halt its aggressive monetary tightening policies within Q1 of 2023…

…but that optimism has taken a couple of severe blows in recent weeks, with key data releases renewing the realisation that the battle is far from over.

The local unit is no stranger to bearing the brunt of shifting global sentiments...

And with several crucial inflation and related economic data releases due in the week, Rand investors were expected to walk a tightrope!

After another calamitous week last time out, the local unit opened doors on Monday firmly on the backfoot at R17.91/$ and looked set to breach the R18/$ psychological barrier in the week.

Unfortunately for the Rand, it didn’t take that long.

As investors pondered over the Fed's upcoming plans and steered clear of riskier assets, the local unit began its first ascent of the week and smashed through the psychological barrier before lunchtime on Monday morning.

The tone was well and truly set for another trying week.

Overnight the Rand settled back in the R17.80s and traded sideways on Tuesday morning, leading up to the US CPI results later in the day.

US headline inflation continued to show signs of improvement, declining to 6.4% from 6.5% in December, but worries quickly resurfaced when looking at the core CPI which advanced 0.4% for the month and a total of 5.6% for the year.

More key data releases came on Wednesday:

First up was the local CPI for January, which revealed that inflation dropped to 6.9% from 7.2% a month earlier, still well above the SARB’s 3-6% target range.

Concerningly though, food inflation still showed no signs of peaking, increasing again in January to 13.8% from 12.7% just a month earlier…

…and comes at a time when real wages in the country are stagnating or declining, thus adding to the cost of living crisis that poor and working-class households are already experiencing.

Local retail sales figures re-emphasised the point, falling by 0.6% in the year to December to mark its second successive contraction following a similar monthly decline a month earlier.

The intense scale of loadshedding was another major factor that dimmed the retail sector, and it came as no surprise when the business confidence index was released later in the day, showing a drop of 4.4 points in January.

In addition to the debilitating power cuts as an indicator of confidence (or lack thereof), is the local currency's performance…

…and following the raft of local data releases in midweek, we saw the Rand set back on its way above R18/$ on Thursday morning, with two major data releases from the US yet to come.

US retail sales results were first and showed improvement, increasing by 3% after two consecutive months of contraction, led by strong automotive and department store sales.

Next was the all-important PPI results, which showed a decline to 6% YoY, down from 6.5% in the year to December; however, on a monthly basis, there was a notable jump of 0.7%, which is the biggest monthly increase since June last year.

Several US Fed members took to the media thereafter to warn that further rate hikes were in the pipeline, with some even suggesting that a 50 basis point increase next month is certainly not ruled out.

Ultimately, a strong jobs market, improved retail sales, and improving manufacturing conditions all indicate an improving US economy, but it also means additional room for the Fed to keep rates higher for longer.

The classic “good news is bad” situation!

Following the economic data releases from the US, the local unit catapulted to R18.22/$ by mid-afternoon on Thursday, looking almost certain to finish the week with another loss.

And then, a quick look at some other news:

• Annual inflation in the UK dropped further last month off the back of easing transport costs but still remains at historically high levels. The UK CPI fell to 10.1% from 10.5% a month earlier. While the improvement was welcomed by battered Brit households, the country is still facing its biggest-ever strikes by public and private sector workers in more than a decade.
• Russia's decision to slash oil production output following a Western price cap imposed on exports in retaliation to its invasion of Ukraine has begun to create concerns over the economic outlook weighed on oil prices after both main contracts increased more than 2% in the week. Receding oil and fuel prices have been the major contributors to inflation gains made globally, but the commodity now seems supported by optimism again owing to China's growth outlook for the rest of the year...

...are we on our way back to $100 per barrel levels again?

By Friday morning, the local unit had notched back up above R18.20/$ but made something of a decent comeback (under the circumstances) after lunch to end the week at R18.05/$.

Another horrific week for local investors, who will be praying for even a glimmer of hope as we head to next week's budget announcement from the finance minister.

And that was the wrap!

The Week Ahead (20-24 Feb 2023)

Here’s what we’ll be keeping an eye on over the next five days:

• SA: Budget Speech 2023, PPI MoM (JAN)
• US: FOMC Minutes, GDP Growth Rate QoQ 2nd Est (Q4)
• EU/UK: EU Core Inflation Rate YoY Final (JAN)

While the local energy crisis remains up in the air, and several international catalysts for further pain to the local economy are still present, the outlook for the Rand isn’t a good one.

The Budget Speech is going to be a massive one to watch, to see what movements in the market that triggers.

This week, one year ago, the Rand was trading at R14.99/$, and that puts into perspective how far we’ve fallen and how difficult the road back is going to be.

Luckily, though, we can look to our sentiment-based forecasting model for direction and to help us and our clients navigate the road ahead safely and confidently.

Can the Rand make a comeback, or is that just wishful thinking for now?

Let’s find out next week, together.

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To your success~

James Paynter