Mid-month madness!
That’s the best way to describe the past week...
...as incoming interest rate decisions were set to plunge markets into more chaos.
Between bumper rate hikes on the cards locally, Eskom running a racket with intensifying power supply breakdowns, rampant inflation, and a seemingly directionless economic outlook, the state of the local economy in the near future looks pretty shambolic.
Add to that the aggressive actions of the US Central bank to curb inflation – Rand bulls are being left clutching at straws and struggling to find even a glimmer of positivity on the horizon.
Ready to see how it all unfolded? Let’s get into the full review below.
Before we dive into a chaotic week, we released the following forecast to our subscribers, showing what we saw in the days ahead, of the Rand moving higher before topping out closer to that R17.88 level. The days ahead were already looking to be messy... (see below - click to enlarge)
As for the talking points from the week, these were some of the biggest ones:
- Interest Rate Hikes – Central banks across the globe were in the spotlight this week as the markets awaited the unraveling of several major monetary policy decisions.
- Loadshedding Ramps Up – Reported ongoing breakdowns and further losses in generation capacity have thrust the country into deeper darkness as Eskom moves to stage 6 loadshedding. When will it end?
- Growing Global Tensions – As the war in Ukraine grinds on, tensions between global heavyweights have continued to develop and are seemingly gathering momentum. Are there other potential global conflicts brewing?
Before the trading week even began, Saffers were dealt yet another progress-stifling blow by Eskom.
Stage 6 loadshedding was announced on Sunday for the rest of the week, with the possibility of even higher levels being implemented...
...this if the power utility is unable to make up its recent losses owing to ongoing breakdowns of outdated and unreliable infrastructure.
All indicators point towards the situation with Eskom getting worse - with no immediate signs to suggest that substantial new capacity is being added.
SA has already suffered 8 consecutive months of power interruptions this year!
This surely has been the main contributor to the contraction of the local economy in Q2...
...and with even higher levels of outages in this quarter, fears over a recession are undoubtedly becoming a reality.
The situation is so grim that President Ramaphosa felt compelled to abandon his trip abroad to return home following the announcement.
Not a great way to head into Monday trade...
...which saw the local unit open on the back-foot, trading around R17.69/$!
As the markets weighed the news of increased power outages, and ongoing rate hikes expected in the US, the Rand continued to take a battering during the morning trade session showing up at R17.79/$ by midday.
Thereafter, the local unit continued to ebb and flow in the R17.60-80/$ region for the first half of the week as it awaited SARB's decision on Thursday morning...
Wednesday's data release showed slight positive news, showing inflation had eased mildly in August to 7.6% after hitting a 13-year high of 7.8% in July.
The question was: Was this enough improvement to prompt a less-aggressive reaction by the SARB?
The answer: An emphatic NO!
The Monetary Policy Committee (MPC) seemed to have made their decision - and cranked up the repo rate by another 75 basis points, taking it to 6.25% as a means of reining in inflation.
In anticipation of the increase, the Rand had strengthened to R17.45/$, but reversed strongly on the back of the decision!
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Here’s a full breakdown of the key factors uncovered locally by SARB:
- The decision for the rate hike came down to a split decision, with three MPC members opting for the ultimately accepted 75 basis point increase, while two members would have preferred a full percent.
- The SARB has now revised its GDP forecast to 1.9% from the previous 2%, with expectations of 0.4% and 0.3% increases in Q3 and Q4, respectively.
- Inflation affecting the price of food for the rest of the year is expected to average 8.1%!
- Core inflation expectations for 2022 remained unchanged in the mid-6.5% region, while 2023 and 2024 expectations were marginally revised down.
One thing is clear: SARB believe they still have more work to do to try and get inflation back to its 3% - 6% target...
...which means that an ongoing period of difficulty for households and businesses is all but a certainty - which is something the battling economy can little afford!
Not just locally, though...
Firstl, as across in the US, the Fed decided to also increase rates by another 75 basis points!
And projections suggest that the Fed is in no mood to slow down either, as all indications point to a further 1.25 percentage points still to come in the next two policy meetings this year.
You can find the full FOMC statement here.
Following the announcement, investors piled back into the US dollar as a safe haven for their investments at the expense of most other currencies.
Incredibly, the US dollar index has already catapulted 16% higher this year, marking the largest jump since 1981.
And then across the pond, we saw more of the same:
- The ECB followed suit, implementing its 9th consecutive rate hike to the tune of 75 basis points as inflation in the 19-country shared economy surged to 9.1% in August from 8.9% a month earlier.
- Possibly the world’s favorite investment destination, Switzerland also saw its National Bank raise its benchmark interest rate to 0.5%, which marks the end of an era of negative interest rates.
- While over in the UK, the Bank of England also raised its interest rates, albeit by a lower than expected 50 basis points, taking the headline repo rate to 2.25% from 1.75% in July. They have also revised their peak inflation forecast to 11% from 13% expected in October this year.
All this seemed to do was give the Dollar a further boost against its contemporaries, as the Euro hit a new 20 year low of € 0.97/$, while GBP fell to £1.08/$, setting a new 37-year low.
All of that in the space of a week!
So what did that mean for the local currency?
Well, it wasn’t a pretty picture.
On Friday - following the plethora of news in midweek - the local unit began to cave in rapidly...
...after opening the day trading at R17.62/$, the rampant US dollar took the reins, stomping the local unit to R17.65/$ before the day’s end...with no signs of easing up anytime soon.
The Week Ahead (26-30 Sept 2022) |
All aboard! It’s full steam ahead into the final week of Q3.
With most of the key economic events for this month now over, next week is expected to be a lighter week of economic news; however, here are the headlines that we’ll be eyeing up:
- US - Durable Goods Orders MoM (AUG), CB Consumer Confidence, GDP Growth Rate QoQ Final (Q2)
- UK/ EU - GDP Growth Rate YoY Final (Q2), Core Inflation Rate YoY Flash (SEP)
While economic data dominated headlines this week, there has also been a notable increase in global tensions rising.
Among which was a speech by Russian President Vladimir Putin announcing, amidst other things, referendums in the Donbass and other Russian-occupied areas, partial mobilization of an additional 300,000 troops, and a warning to NATO that he is ready to use nuclear force to defend Russia if necessary.
This comes just a week after he met with long-time ally Xi Jinping.
Coincidence or not? Who can say...
...but some reports indicated that the two authoritarian leaders reaffirmed their no-limits relationship in creating a counterweight to dominance from Western nations.
Which leaves us wondering - is there any connection between the two events considering the recent Chinese-US tensions?
We certainly hope not, but we can’t completely disregard it either.
Time will tell.
On the economic side - the aggressive nature of the US Fed’s monetary policy is the latest move in a synchronized policy shift that is sure to test the resilience of the world’s number one economy...
...and the ability of countries globally to manage ongoing exchange rate shocks as the value of the US dollar continues to soar.
Best proceed with caution. It’s a treacherous road ahead.
We’ll be relying on our Elliot-Wave based forecasts to provide some direction. You can too!
Please take our Rand forecasting service for a test-drive!
This will give you access to the same charts we are to give us and our clients the likely direction of the Rand - ahead of time, enabling you to make educated and informed decision.
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Look forward to hearing from you.
To your success~
James Paynter
