Welcome to another edition of our Weekly Rand Review.

In a week scarce with local data, the Rand was left vulnerable to external influences.

As investors sought direction, they turned their attention abroad, where key economic events and decisions were set to shape market sentiment.

The standout event of the week was the release of US inflation data which would provide further clues on the possible trajectory of the US Feds plans at next week’s interest rate decision.

Europe was also in the spotlight, with the ECB making its latest interest rate decision in the week as well.

While external factors dominated the financial landscape, the Rand faced internal challenges too, chief among which was the ongoing issue of intensifying scheduled power outages that continues to pile the pressure on the fragile economy.

A thin week of events - let’s get into it...

Key Moments (11-15 September 2023)

These were some of the major headlines over the last five days:

• Mining and Manufacturing - Stats SA released its latest round of data for the all-important mining and manufacturing sectors, showing a mixed-bag of results, though the worrying signs are evident.
• US Inflation Increases - Consumer prices in the United States increased in August 2023 compared to the previous year, primarily due to an increase in gasoline prices, as reported by the Bureau of Labor Statistics.

The Rand started the week a shade above the R19/$ mark but began on the front foot for a change and pulled below the psychological barrier by lunchtime.

The main driver of the gains were robust lending figures and newly implemented stimulus measures in China, South Africa's largest trade partner, that bolstered risk-related currencies like the Rand.

However, with loadshedding ramped up to stage 6, it was already difficult to see the local unit being able to make any real sustained gains for the remainder of the week.

While a thin week of local data was expected, Stats SA did reveal that the volume of electricity generated in SA fell by 3.4% in July...

...which did not spell good news for the foreseeable future of loadshedding or the local mining and manufacturing results that were also due in the week.

Eskom explained in the week that more severe stages of load shedding were implemented due to increased demand caused by colder weather, ongoing generator breakdowns, delays in restoring units to the power grid, and an escalation in planned maintenance.

In a meeting during the week, the Cabinet received assurance from the power utility that the heightened load shedding is a temporary measure that will yield long-term advantages for the country.

Ministers have adopted the slogan "short-term pain for long-term gain" to emphasize this perspective.

This has got to be the longest-running joke since trying to figure out why the chicken crossed the road!

But, while power plants are being sabotaged, trucks are being hijacked, and the country is being left in darkness for hours on end, it seems that the powers that be are more concerned with other matters.

In a briefing to the Standing Committee on Public Accounts (Scopa), the SIU criticized former Eskom CEO Andre De Ruyter for initiating an unauthorized inquiry into corruption at Eskom, during which an "unapproved" private company obtained access to data within the state-operated power utility.

Earlier this week, the SIU revealed its intentions to explore avenues for holding De Ruyter and other parties responsible for an unsanctioned inquiry into the power utility.

This would encompass the private firm involved in the investigation, George Fivaz Forensics and Risk (GFFR), the private companies and business associations that financially supported the project...

...as well as any Eskom employees who provided information.

The SIU emphasized that De Ruyter had initiated the investigation independently, with no input from the Eskom board regarding the appointment of investigators, no allocated funding for the inquiry, and no receipt of reports on the findings.

They further expressed concern over private entities conducting investigations into state institutions without proper authorization, asserting that such actions should not be permitted...

...especially since the government and the SIU itself were doing such a bang-up job of clamping down on the corruption at the state institution, right?

Nevertheless, the SIU suggested that "consideration should be given" to holding De Ruyter accountable for this breach, though a decision is yet to be made.

And just like that, attention once again has been neatly shifted away from getting to the bottom of the allegations regarding high-ranking officials that were involved in actually bringing the state utility to its knees.

Anyway…back to the Rand.

On Tuesday, the local currency depreciated against the greenback, with markets eagerly anticipating the release of US inflation data on Wednesday...

...which could provide insights into the Federal Reserve's future interest rate decisions.

Before that, though, a report in the week showed that early indications suggest that South African drivers may face yet another substantial increase in petrol and diesel prices for October…

…with a bleak outlook for November and December looming, primarily driven by international oil supply issues and the weakening Rand.

Currently, Saffers are grappling with nearly R25 per litre to refuel their vehicles as of September 6, with diesel and petrol costs surging by approximately R1.71 and R2.84 per litre, respectively.

Throughout this year, fuel prices have experienced significant hikes, with petrol prices surging by 14.6%, and diesel, despite consecutive cuts in the first half of 2023, increasing by 8.7%.

Looking ahead, early projections for petrol and diesel from the CEF paint a grim picture for South African motorists, with an expected increase of R1.22 for petrol 93-octane users and R1.28 for 95-octane users to come in October 2023.

Then to the big one:- the US Inflation results.

Consumer prices in the United States saw a 3.7% increase in August compared to the same period last year, primarily driven by surging gasoline prices.

On a month-to-month basis, the inflation rate accelerated by 0.6% in August, which was a notable increase compared to the 0.2% rise observed in July.

It also marks the second consecutive month of rising annual inflation, following 12 consecutive months of decline.

Core inflation, which excludes the volatile components of energy and food prices, increased by 4.3%, aligning with expectations.

Although inflation has notably eased since the previous summer when prices for energy, housing, and used cars surged to four-decade highs, it remains elevated compared to the 2010s and significantly exceeds the Federal Reserve's 2% target.

Federal Reserve Chair Jerome Powell acknowledged the moderation in inflation but emphasized that there's still a considerable distance to go in achieving the 2% target.

The Fed's upcoming decision on a potential interest rate hike is scheduled for next week.

While an additional rate increase could help counteract inflation by slowing economic growth and reducing demand, it carries the very real risk of potentially pushing the U.S. economy into a recession, as well as sparking a banking crisis in a sector (and economy) overladen with debt.

The Bureau of Labor Statistics also revealed that despite steady hiring in August, with the U.S. economy adding 187,000 jobs, there were significant downward revisions to job growth estimates in June and July, resulting in a combined reduction of 110,000 jobs.

The monthly rise in overall consumer prices was significantly influenced by the gasoline index, which contributed the most to the increase, accounting for more than half of the total increase.

Energy prices, as a whole, increased by 5.6% in August, following a minimal 0.1% rise in the previous month.

The notable spike in gasoline prices can be attributed to the rise in oil prices, which increased from approximately $70 per barrel at the start of July to $81 per barrel at the beginning of August.

Overall, the big picture is that inflation is much lower than where it was last year, but is still far from being in a safe zone, with oil prices still threatening to have a say.

The dollar gained on most emerging market currencies following the CPI results and the Rand was back above R18.80/$ by Wednesday evening.

Thursday brought the release of the major local data results for the week in the form of mining output, which experienced a 3.6% year-on-year decline in July.

This followed a revised 1.3% growth reported in the previous month and is now at its lowest level in four months.

Among the most substantial negative contributions came from platinum group metals (-10.4%), coal (-7.0%), and diamonds (-33.4%).

In contrast, though, other results in the week revealed that manufacturing output expanded by 2.3% year on year in July, following a more robust 5.9% increase in June.

Prior to that, manufacturing had shown annual growth of 2.5% in May and 3.6% in April.

The significant deviation in mining production figures raised concerns regarding export prospects, subsequently exerting downward pressure on the value of the Rand…

…and the local unit had nowhere to hide and was back above R19/$ as we headed into Friday.

Before we continue, let's take a look at some of the other notable stories of the week:

• The employment situation in the UK appears to have deteriorated, marked by a rise in unemployment and a decline in overall employment in the last quarter. According to the latest labor market report, unemployment increased by 159,000 individuals over the past three months, reaching a total of 1.46 million.

  This increase pushed the unemployment rate up to 4.3%, a notable increase from the previous quarter's 3.8%. These developments have led to calls for the Bank of England to reconsider its policy of raising interest rates, which has been contributing to the weakening of the pound.

• On Thursday, the European Central Bank (ECB) announced its 10th consecutive increase in the main interest rate, prioritizing the battle against inflation despite a weakening economy. These rate hikes have propelled the central bank's main deposit facility rate from -0.5% in June 2022 to a historic 4%. New projections anticipate inflation to average 5.6% this year, up from a previous forecast of 5.4%, and 3.2% next year, up from a prior estimate of 3%.

  In a statement that significantly impacted the market, the ECB also indicated that further rate hikes might not be on the immediate horizon. Christine Lagarde emphasized that there is no definitive answer regarding whether rate hikes have concluded, as the Governing Council's decisions continue to hinge on incoming data.

On Friday morning, the Rand strengthened in early trade, but with nothing to entice market participants to extend their exposures, it was a short-lived improvement.

The local unit opened at R19/$ and drifted upward into the weekend a little below R19.10/$.

A tiny green arrow but unfortunately, nothing to get excited about.

The Week Ahead (18-22 September 20233)

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

• SAInflation Rate YoY (Aug), Retail Sales YoY (Jul), Interest Rate Decision
• EU/UK EU Inflation Rate YoY (Aug), UK Inflation Rate YoY (Aug), BOE Interest Rate Decision
• US FOMC Economic Projections, Fed Interest Rate Decision, Fed Press Conference

With a bumper-to-bumper week of crucial interest rate decisions scheduled locally and abroad, we are likely to see a fair bit of sentiment shifting…

…which usually signals action in the currency market.

Our forecasting models are primed and ready to help us navigate the week and beyond for those following the predictions.

Please reach out to us if you have any questions or would like more information.

See you next week.

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To your success~

James Paynter

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