Welcome back to the Weekly Rand Review, your go-to source for the latest updates on South Africa's resilient yet susceptible currency.

In another week of limited local economic data, investor sentiment was expected to be heavily influenced by events unfolding on the global stage, particularly in the United States.

Last week, all eyes were on the eagerly awaited release of the Federal Open Market Committee (FOMC) minutes as investors and market participants searched for insights into future monetary policy decisions, seeking clarity on the Federal Reserve's stance amidst ongoing concerns about sticky inflation.

As we’ve seen of late, whenever the Fed indicates potential interest rate hikes to combat inflation, it often triggers significant movements, leading to huge swings in emerging markets like the Rand, one way or the other...

...depending on the underlying sentiment at the time.

A slow week dictated by events abroad. Here’s how it unfolded.

Key Moments (3-7 July 2023)

These were the major headlines over the last five days:

• FOMC Minutes -Emerging market currencies tumbled in midweek as the Federal Reserve’s June meeting minus unveiled a hawkish policy stance, prompting investors to steer clear from riskier assets.
• US Labour Market - The US jobs market once again defied expectations as results released in the week showed that almost half a million jobs were created in June, significantly up from 267,000 the previous month.

After briefly breaching R19/$ and making a mini-comeback late in the previous week, the Rand opened on Monday trading at R18.79/$.

With limited data expected in the first half of the week, the local unit gained with reduced loadshedding levels and increased bets that Russian President Vladimir Putin would not be attending this year's BRICS summit helping to improve sentiment toward the Rand...

...although at this stage, all seems unconfirmed.

The local unit traded steadily in the mid-R18.60s through Tuesday, ahead of the main attractions of the week.

The Federal Open Market Committee minutes was the main aspect and showed that almost all members noted that they felt additional increases in the target federal funds rate during the current year would be appropriate.

In June, the Fed decided to keep interest rates unchanged at 5.0% - 5.25%.

Market participants seemingly viewed the tone of the minutes as hawkish, and the greenback gained support pushing the Rand to R18.80/$ by the close of play on Wednesday.

Head of the US Federal Bank, Jerome Powell, addressed the media the next day, noting that although monetary policy is restrictive, it may not be restrictive enough and has not been restrictive for a long time…

..which further upped expectations of an incoming rate hike in July from onlookers.

SARB Governor Lesetja Kganyago echoed the Fed boss’s sentiments saying that there is no doubt that local monetary policy will remain tight for longer than originally expected.

The Rand seemed to have navigated a tricky 24 hours up to that point...

...but that was until the blockbuster private payrolls report emerged from the US.

Private payrolls in June shot up by a whopping 497,000, massively above the 267,000 increase posted in May and even further above expectations of around 228,000.

The strong jobs number added greatly to the belief that the Fed would increase rates again at its next meeting.

If you’re wondering why the dollar gains on interest hikes, here’s a quick reminder of what economists THINK, happens...

Firstly, emerging economies are often more vulnerable to external shocks and fluctuations in global markets due to their relatively smaller size, less diversified economies, and higher dependence on exports...

…which makes them more exposed to changes in global economic conditions and the ensuing investor sentiment.

As the US Federal Reserve increases interest rates, it tends to attract global capital flows as investors seek higher returns. Ultimately, higher interest rates in the US make investing in US assets more attractive to investors, as they can earn higher yields on their investments.

As a result, capital flows out of emerging markets and into the US, putting downward pressure on emerging currencies in a phenomenon commonly known as "capital flight."

However, the impact of increased interest rates in the US on emerging currencies goes beyond just capital flows, as it also affects borrowing costs for emerging market economies.

When US interest rates rise, borrowing becomes more expensive for countries (like SA) with external debt denominated in US dollars.

Furthermore, a stronger US dollar resulting from higher interest rates can dampen global demand for commodities, which many emerging economies heavily rely on.

Makes sense?

Rational?

Logic?

Yes, maybe....

Because it depends on where the underlying sentiment cycle is at the time, and what persons are focusing on - whether...

...the positive (a higher yield would make investors want to invest in Dollars)...

...or negative (higher interest rates will increase the cost of business and debt, make it more difficult to do business, and ultimately harm the economy.

And that is why there is no correlation between these two...

...and why the Dollar index actually didn't gain but had a down week!

Moral of the story: NEVER take standard economic commentary to be fact. It is based on logical hypothesis and assumptions, and markets are predictably irrational and illogical!

Anyway, economist rant over - time to move on...

By mid-afternoon, the Rand had crashed past the R19/$ psychological barrier and snowballed all the way to R19.15/$, the worst level in almost a month, and was set to record a major loss for the first week of Q3.

But this was not exactly unexpected...

Well, perhaps for some it was - but not all!

Our forecasts had been calling this since 21 June, where we had anticipated the move up until the target area of 18.78-19.21, before we would see the market top out.

(Click to enlarge)

These are the kind of reports we deliver twice a week to our subscribers, with predictions for the next few days, weeks, months and years.

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Before we wrap up, let’s take a quick look at some of the other headlines from the week.

• In a week dominated by global monetary policy plans, ECB President Christine Lagarde made an interesting point in an interview on Tuesday, stating that while inflation is expected to remain elevated for a while, the nature of the inflation challenge is changing as it works its way through the economy causing different economic agents to try and pass the costs on to the next person. She added that as a result of this development, the ECB is far from declaring victory yet, leaving the door wide open for another rate increase next month.
• The previous week we covered the situation in Russia between Putin and Wagner Group boss Mr. Prigozhin, which seemingly ended with Belarusion President Lukashenko playing mediator. Since then, it was believed that Prigozhin would remain in Belarus, but reports in the week suggested that the mercenary leader was spotted in St. Petersburg. Lukashenko confirmed that Prigozhin was not in Belarus when questioned by the media on Thursday and added that they do not know of his whereabouts and do not have the ability or desire to track his movements at present. The information war continues...

After opening at R19.07/$, the Rand traded sideways for the early part of Friday but made an excellent surge toward the close of the day to end the week in the mid-R18.80s.

Not the worst-possible start to Q3, but a red week nevertheless.

The Week Ahead (10-14 July 2023)

Another week that will likely be dominated by global events. Here’s what we’ll be keeping an eye on:

• SA - Manufacturing Production MoM (May), Mining Production MoM (May)
• EU/UK - UK Unemployment Rate (May), UK GDP YoY (May)
• US - Inflation Rate YoY (Jun), PPI MoM (Jun)

Next week’s major event will come out of the US, where all eyes will be on the final figures for inflation in June.

With the Fed displaying a hawkish mood last week, it seems that they are expecting a below-target reading, and if that were to be the case, we should be in for an action-packed week in the currency market. Our forecasting models have been on song in recent weeks and our clients have been seeing huge benefits as a result.

Those same forecasts are showing a few interesting (and potentially profitable) projections in the near future, so be sure to give them a try if you aren’t already a subscriber.

See you all next week!

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To your success~

James Paynter

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