Welcome back to the Weekly Rand Review, your guide to understanding the recent movements of South Africa's currency, deciphering investor sentiment, and making informed trading decisions.

A month’s worth of gains for the Rand reversed in a week!

That pretty much sums up what happened over the past five days in the local currency market as events from our own shores and abroad shifted sentiment away from riskier markets.

Chief among the major stories of the week was the decision by Fitch Ratings to strip the United States of its top-tier sovereign credit grade…

…while recent antics by EFF leader Julius Malema added a layer of uncertainty and volatility to the local political landscape, contributing to investors feeling the need to reassess their risk exposure to the Rand.

August is off to bang, and our Elliottwave and cycle-based modelling was right on the money again!

Let’s get into the finer details!

Key Moments (31 July - 4 Aug 2023)

These were the major headlines over the last five days:

• Local Manufacturing -In July, South Africa's manufacturing Purchasing Managers' Index (PMI) declined to its lowest level since July 2021, when the economy was severely impacted by the devastating riots.
• Juju Causes a Stir- EFF leader Julius Malema made headlines in the week after footage of the party chanting the struggle song Kill the Boer at their 10-year anniversary rally hit newsrooms and social media platforms worldwide.
• US Credit Status - Fitch Ratings downgraded the US from its top-tier sovereign credit grade, citing concerns over the country's increasing fiscal deficits and a decline in governance, which has resulted in repeated clashes over the debt limit in the past two decades.

After a late surge at the backend of the previous week, the Rand got going on Monday at R17.59/$ and was on course to finish off what would have been one of the best-performing months for the local unit in a long while.

However, it was forced to take a step back early in the week over events that took place at the 10th-anniversary celebration of the EFF over the weekend.

After footage emerged of the political party leader leading his troops in the chanting of the struggle song, Kill the Boer, Elon Musk accused Juju of openly pushing for the genocide of white people in South Africa on his social media platform X (previously Twitter).

Sadly from an economic perspective, these types of political embarrassments do not bode well for the local currency, and the Rand ended the month at just below R17.80/$...

…which was still a solid month's performance, all things considered.

From that point on, though, it was all downhill.

After weakening, the local unit opened Tuesday trade at R17.94/$ as the greenback began its resurgence, buoyed by data that highlighted the resilience of the world's largest economy.

Despite signs of disinflation, the strength in consumption has seemingly countered these concerns, with economists suggesting the economy may avoid a severe recession even with interest rates at 5.5 percent.

But that was before the big news of the week dropped.

Fitch Ratings took the decision to downgrade the United States' sovereign credit rating , moving it one level down from AAA to AA+.

The downgrade came as Fitch criticized the country's ballooning fiscal deficits and an "erosion of governance" that has led to repeated debt limit clashes over the past two decades and echoes a similar downgrade made by S&P Global Ratings over a decade ago.

According to Fitch, tax cuts, new spending initiatives, and multiple economic shocks have contributed to significant budget deficits…

…while medium-term challenges concerning rising entitlement costs have not been adequately addressed.

The credit rating agency expressed concern over the expected fiscal deterioration over the next three years, the high and growing general government debt burden, and the erosion of governance relative to peers with 'AA' and 'AAA' ratings.

This was immediately met with sharp criticism from Treasury Secretary Janet Yellen, saying she strongly disagreed with the decision which she believed was "entirely unwarranted" and "arbitrary" because it ignored improvements in governance metrics.

Really?

Maybe let's look at the numbers that really matter when it comes to a credit rating.

Firstly, what has happened to the Total US Federal Debt the last 3 years?

As can be seen, this has jumped by 35% in the last 3 years...

...to a mind-numbing 31.5 trillion dollars!

But then, perhaps what is even more critical is the cost of servicing this debt?

And this is where the real shock comes...

As can be seen from the above chart, the interest burden has skyrocketed in the last 3 years - from $526 billion in Q3 of 2020...

Pretty clear there’s a serious issue!

Fitch had previously warned about the possibility of a credit rating cut back in May, when Democrat and Republican lawmakers were in disagreement over raising the nation's borrowing limit, and the US Treasury was facing the risk of running out of cash.

Although the crisis was eventually averted, Fitch pointed out that the repeated debt-limit clashes and last-minute resolutions with all kinds of strange spending areas being squeezed into bills have diminished confidence in the US's fiscal management...

In summary: This is a classic picture of a debt spiral that is now out of control, and this downgrade has been a long time in coming.

EM currencies, including the Rand, faced almost immediate turbulence as investors sought safe havens and abandoned riskier assets, triggered by concerns about global economic growth prospects following Fitch Ratings' downgrade of the US government's top credit rating.

The result?

The Rand was back in the mid-R18.20s by close of business and above R18.30/$ by midweek.

Meanwhile, recent data unveiled another gloomy outlook for the South African economy, grappling with challenges stemming from load shedding and Transnet issues.

Sentiment within the local manufacturing industry dropped to its lowest level since the July riots in 2021 as the Absa Purchasing Managers' Index, compiled by the Bureau for Economic Research, declined to 47.3 in July from 47.6 the previous month.

This marks the sixth consecutive month below 50 for the industry, signifying alarming contraction in a sector that contributes approximately 14% to South Africa's gross domestic product…

…and the sustained downturn is now the most prolonged since 2019.

Adding to the gloom, the South African Revenue Service (SARS) reported a preliminary trade balance deficit of R3.5 billion in June 2023.

The deficit was driven by exports totaling R167.6 billion and imports amounting to R171.1 billion, including trade with Botswana, Eswatini, Lesotho, and Namibia (BELN).

SARS stated that the year-to-date preliminary trade balance surplus of R5.6 billion represents a deterioration compared to the R129.6 billion trade balance surplus recorded during the same period in 2022…

…while on a month-to-month basis, exports experienced a decline of R15.8 billion (8.6%), from R183.4 billion to R167.6 billion between May and June 2023 and imports decreased by R2.7 billion (1.6%), from R173.9 billion to R171.1 billion during the same period.

The preliminary cumulative trade balance deficit for 2023 was R54.4 billion, in contrast to the R72.6 billion trade balance surplus recorded in 2022.

On Thursday, the greenback strengthened further as investors overlooked Fitch's US credit rating downgrade…

…but why would that be?

Well, there is a case to be made that businesses and individuals prioritize the need for US dollars to settle their invoices and dollar-denominated debts.

As a result, despite the news of the downgrade, there hasn't been a significant pushback, as the demand for US dollars remains essential worldwide.

Unfortunately for the Rand, this meant bad news, and within the first hour of trade on Thursday, the local unit broke back above R18.50/$ and pushed onward to the mid-R18.60s by evening...

...which was just what we had been expecting, based on our forecasting modelling from the previous week, as can be seen below.

(Click to enlarge)

Our target area was in the R17.18-R17.65/$ range, and right on cue, the bottom came at R17.56/$ before surpassing the R18.20/$ test and smashing through the next resistance at R18.42/$.

If you were on these predictions, congratulations, and well done!

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The Rand eventually closed trade on Thursday at a shade below R18.70/$, almost completely erasing the gains made over the last month and once again under immense pressure heading into Friday…

…when the crucial Non-farm Payroll report from the US was due to be released.

But before that, let’s take a quick look at some of the other major news headlines of the week:

• The Bank of England raised its key interest rate for the 14th consecutive time on Thursday by a quarter-point to 5.25 percent, prompted by the UK's persistently high inflation and exacerbating the ongoing cost-of-living crisis. The annual inflation rate in Britain remains close to 8%, significantly surpassing rates in the Eurozone and the United States. As a result of this rate hike, borrowing costs have reached the highest level in over 15 years.
• With substantial diesel and petrol price increases implemented for South Africa on Wednesday, concerns about higher oil prices have reignited inflationary pressures. In July, oil witnessed its most significant monthly surge in over a year, driven by increased demand alongside production cuts by oil producers. As it stands, there is no certainty that oil prices won't spark a second wave of inflation, and this potential scenario may lead to prolonged higher interest rates, especially in the US, where economic indicators continue to display strength.

On Friday morning, the Rand was trading in the mid R18.60s ahead of the US unemployment and Non-farm Payroll reports, which could play a major role in influencing the US Fed on whether to raise policy rates again this year.

As it turned out the US economy sustained a steady rate of job expansion, with non-farm payrolls increasing by 187,000 jobs last month while the unemployment rate fell to 3.5% in July from 3.6% a month earlier...

...but the question is whether this is healthy expansion or existing workers taking second and third jobs to make ends meet amidst sky-rocketing inflation and interest costs?

The initial response to the payroll results supported feelings that the Fed may have come to the end of their hiking cycle which gave emerging markets a slight bump in the right direction, but not by enough to reverse the damage done earlier in the week.

The first red arrow in a while, and a big one at that.

The Week Ahead (7-11 Aug 2023)

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

• SA - Mining and Manufacturing Production YoY (Jun)
• EU/UK - UK GDP YoY (Jun)
• US - Balance of Trade (Jun), Inflation Rate YoY (Jul), PPI MoM (Jul)

A shorter trading week locally as Saffers celebrate National Women’s Day next week, but a big week on global markets as the latest inflation figures from the US are set to be revealed.

Our forecasting models are predicting a few interesting and potentially profitable moves over the upcoming weeks, so be sure to check them out if you haven’t already done so.

Catch you next week!

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To your success~

James Paynter

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