Welcome back to another installment of your favorite Weekly Rand Review…

...which is also our last one for the year.
And what a week it was!

As some business sectors and employees start to wind down for a yearend break, markets across the globe are showing no signs of taking a holiday just yet. Last week, investors were waiting on two key announcements from the US: Inflation results and the Feds interest rate decision…

...the results of which would ripple across the globe – including SA.

Locally, traders were also preparing for a raft of domestic economic data that would shed further light on the trajectory of the economy for the rest of the year. Key inflation, labor, and monetary policy decisions were also coming thick and fast from across Europe in the week while central banks continued to recalculate their plans for what’s evidently going to be a challenging 2023.

We’ve got lots of ground to cover, so adjust your seats to an upright position and fasten your seatbelts…

…here’s the full review.

Key Moments (12-16 Dec 2022)

In a week ladened with key data releases, these were the biggest:

• Domestic Data – Among the key local data releases that influenced the Rand in the week were October’s mining output and retail sales figures, along with November’s consumer and producer inflation results.
• US Inflation – US inflation ticked lower in November, but though the overall picture is improving, the costs of necessities continue to climb.
• European Data – Inflation results for November showed improvement in the UK and Eurozone but remains more than 5 times above the central banks’ target range.
• Presidential Reprieve – From the verge of resignation to the cusp of re-election, President Cyril Ramaphosa seems set for another term as leader of the ANC as the ruling party flexed its strength yet again, leaving opposing parties and citizens bamboozled.

Our journey starts at home, where the local unit opened trade a touch below R17.30/$ and was quickly on the back foot as traders readied for a tidal wave of incoming economic data through the week. Rand bulls were also keeping a close eye on the developments in Nasrec involving President Ramaphosa and the drama surrounding the Phala Phala incident.

After a heated build-up, most onlookers were left gobsmacked as the majority of ANC lawmakers nonchalantly voted to quash the report that found the President may have breached the Constitution…

...which may even bolster his campaign and pave the way for re-election at the next ANC conference.

The report was eventually rejected by 214 legislators, while five legislators voted against him, most notably Nkosazana Dlamini-Zuma, who was the first to break ranks in the voting process. This had immediate repercussions - as she was now to face a disciplinary process for daring to do so.

Just another reminder of the politics and undercurrents within the ruling party.

Nevertheless, the decision not to move ahead with impeachment proceedings, for now, may prove to be a net positive - albeit in the short term - for SA’s financial market and the Rand.

The risk-sensitive Rand is highly susceptible to changes in global investor sentiment, but a stable political environment is equally essential to attracting investment. With the US Fed expected to slow its pace of interest rate increases in 2023, the local unit will be hoping to capitalize on its healthy interest-rate differential with the dollar and rising demand for commodity exports as China reopens its economy.

The biggest risk, though, will likely remain in global oil prices and the possibility of it rising as the OPEC+ cartel continues to under-deliver in support of increasing prices. With winter now in full swing in the northern hemisphere, the next few months will likely unpack how much of an impact potential oil and gas shortages will have on the global economy in 2023.

Nervy times ahead!

In terms of local economic data, there were a fair few crucial reports in midweek. Here’s a summary of what you may have missed:

• The R1 trillion mining industry continued its downward spiral as the sector recorded a ninth consecutive month of decline in October. Production declined by 10.4% YoY and 2.5% for the month, following a 5.1% decline in the year to September.
• According to Stats SA, the headline CPI cooled slightly to 7.4% in November from 7.6% a month earlier. Despite now being at its lowest level since June, inflation is still above the SARB’s 3-6% range, which would suggest further interest rate hikes next year, though possibly less aggressive ones.
• And then to Eskom! After pulling back to stage four loadshedding in the week, the power utility reimplemented Stage 6 on Friday owing to multiple breakdowns at its power stations...again. Just 24 hours earlier, Eskom announced that residents in parts of Johannesburg would be exempt from loadshedding due to severe storms in the week that caused widespread flooding in various parts of the province. With further inclement weather expected over the next few weeks and Stage 8 levels still lingering, it really doesn’t look good for Saffers heading toward the December break.

Next, we head abroad to the US for the most important data releases of the week:

• The US inflation reading provided some much-needed Christmas cheer, continuing it's gradual softening to 7.1% over the year to November, down from 7.7% in October. While the overall picture is showing improvement, the cost of certain essential items, such as food and housing, continues to increase. The price of groceries has climbed by 12% over the last year, while housing costs increased by 7.2% over the same period.

The following day, in response to the inflation results, the US Fed took to the stage and announced a 50 basis point increase, taking it to a targeted range between 4.25% - 4.5%, its highest level in 15 years. Fed Officials once again indicated that they expect to keep rates higher through 2023 and foresee very little to no reduction until 2024, and emphasized that by adjusting the expected terminal rate to 5.1%!

But this is not the whole story.

While they indicate what they are going to do, how they plan to keep rates higher etc etc, blah blah, there is actually a giant smokescreen when it comes to Fed setting the rates. Persons believe that the Fed and other central banks set interest rates...and the markets react.

But that is a complete myth!

The fact is that the Fed is 100% reactive, and just follows the market-determined Treasury Bill rates with a little lag-time. They look at the market rate, and then they adjust the Fed Funds Rate accordingly. To put it in the words of Elliott Wave International's Bob Prechter "That's all there is to it. That's all there ever has been to it."

See the proof in their chart published below:

How is that for debunking a commonly-held belief?

While inflation continues to show signs of slowing, there is still an ever-growing concern that the world’s top economy will tip into recession as long as rates remain elevated until prices are brought under control. Ahead of the midweek US inflation results, the local unit shot as high as R17.75/$ by lunch on Tuesday and dropped to R17.06/$ before the US Fed’s interest rate announcement on Wednesday.

The final stop on our journey takes us to Europe for the UK and Eurozone’s inflation rates and interest decisions from the respective central banks. These were the highlights:

• On Thursday, the decision taken by the BoE was to raise the interest rates by another 50 basis points from 3% to 3.5%. The most recent hike marks the Brit's ninth consecutive increase in interest rates and records its highest level in 14 years.
• The unemployment rate in the UK rose from 3.6% to 3.7% in the three months up to October, while vacancies fell by 65,000 as economic pressures continue to affect recruitment. Ongoing industrial action across various work sectors in the UK has continued to intensify and reports in the week also showed that more people over the age of 50 were being forced to return to work as they try to cope with soaring inflation and a deteriorating economy.
• Meanwhile, in the Eurozone, after two consecutive 75 basis point hikes, the European Central Bank decided to follow suit of the US and UK by stepping down to a 50 basis point increase in its final monetary policy meeting of the year. Inflation dropped to 10% in November for the first time in almost a year and a half.

As our weekly journey drew to a close, we headed back home, where the local unit was directionless through the rest of the week as investors and markets digested the events of an action-packed week. After a strong midweek showing, the Rand U-turned overnight and was trading at R17.28/$ on Thursday morning and continued to bleed into the backend of the week, eventually ending in the high R17.60s.

Can the local unit pull back toward R16 levels by yearend, or are we en route to R18/$ again?

It sure is going to be an interesting run-up to yearend!

The Week Ahead (19-24 Dec 2022)

This next week is expected to be a relatively thin week, with most of the major economic data releases complete for the month, but these are the headlines we’ll be keeping tabs on:

• US: CB Consumer Confidence (DEC), GDP Growth Rate QoQ Final (Q3), Core PCE Price Index YoY (NOV)
• UK: GDP Growth Rate YoY Final (Q3)
• SA: Leading Business Cycle Indicator MoM (OCT)

As we head into the penultimate week of the year, a key question facing most economies is the extent to which monetary policy tightening will be able to bring the rampant inflation under control…

...and perhaps more worryingly, at what cost will it come to the economy and the already battered citizen?

While we eagerly prepare to close the door on a forgettable 2022, we have to bear in mind that the damage done won’t magically disappear when we turn the calendar over, and the effects of this year will certainly be felt for months (or even years) to come.

Making smart decisions are a must!

We'll be relying on our Elliottwave-based forecasts to provide us and our clients with expected direction, enabling better decision-making with more clarity and confidence - and less stress, time and energy. Please join us as we see out the year safely - and to plan with some objective information for the new year.

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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To your success~

James Paynter