Welcome back to another episode of your favorite weekly Rand Review!

So, 2023 is well and truly underway, and while the new year has been a period of strength for most developing economies, January has quickly turned into Janu-worry for the local unit. The Rand has already had a difficult start to the year, and last week, it weakened even further against major currencies, despite the greenback continuing to recede against most emerging economies.

A relatively light but important week of economic data was expected, headlined by the local interest rate decision and US GDP results due toward the backend of the week…

…with a couple of other talking points along the way.
No time to lose - let’s jump straight into last week’s highlights.

Key Moments (23-27 Jan 2023)

Here were the week’s major headlines:

• Interest Rate Decision - Following consecutive 75 basis point hikes, the SARB has switched gears to 25 basis points for January, which may suggest that the hiking cycle is not yet done.
• Eskom bites back - SA’s wilting power utility hit back at the President last week regarding his request to halt the incoming tariff increases saying that “Costs don’t just disappear.”
• US GDP improves - The world’s number one economy expanded at a healthy rate in Q4 of 2022, but underlying data suggests that growth in other areas may face major difficulties this year.

We kicked the week off locally, where Rand bulls were hoping for a better week after the local unit disappointed last time around. By the first call on Monday, the local unit opened at R17.12/$ but was quickly on the back foot as extended electricity cuts remained the major source of investor concern.

By midday, the Rand was already back above R17.20/$ and traded sideways for the rest of the day as markets prepared for major data releases later in the week.
On Tuesday morning, reports began circulating regarding Eskom’s response to President Ramaphosa’s request for a halt to the power tariff increases…

…but it was not the good news Saffers were hoping for.

Eksom pointed out that NERSA is the only authority that has the ability and rights to set the price that residents can be charged for electricity and followed up by stating that “Costs don’t just disappear.”

Yes, they don't - unless you do something about them!

...but they don’t just appear either, do they?!

Let's maybe look at one of these costs - a significant one:

In their March 2022 financial statements, Eskom stated that "...employee costs have remained relatively stable at R33 billion, despite a reduction in headcount of 5.4% to 40 421 by year end"....

...which equates to an average salary package of R816 407 per annum!!

How can any company justify that kind of cost??

Let alone one which is losing money!

This is a cost that can be - and should be - cut drastically!

On top of that, following further meetings in the week, additional reports have emerged stating that load shedding would likely become a permanent issue for the next two years!

Despite the best efforts of the DA and local municipalities in recent weeks, it seems ever more likely that Saffers need to prepare for the 18.65% increase or risk being in darkness from April onward.

The ongoing power crisis has already put investors off the country, and with no solid solution in sight and permanent loadshedding for the next two years, it doesn’t look good for the local unit.

Following these reports, the Rand wilted further and breached above R17.30/$ by midday on Tuesday. On Wednesday, the local unit strengthened slightly as investors refrained from placing big bets ahead of the central bank's interest rate decision due the next day. While a 50 basis point increase seemed to be the wide expectation, the SARB eventually opted for a smaller 25 basis point hike instead…

…which possibly suggests that the central bank is still tentative about the market and is buying time to see it through for another month before potentially considering a halt to rate hikes.

The latest increase will take the repo rate in South Africa to 7.25%, while the prime lending rate will tick over to 10.75%. The bank also released a raft of forecast adjustments, and among the more concerning ones was GDP growth which has been revised down to just 0.3% for the year given the scale of loadshedding.

The forecasts for 2024 and 2025 GDP were also revised down to 0.7% from 1.4% and 1% from 1.5%, respectively. It’s all becoming a vicious cycle - Loadshedding affects investor confidence, which affects the exchange rate, which affects the price of goods, which affects consumer spending…

…and on it goes! And those are just the local factors.

The SARBs less aggressive stance was almost immediately evident as the Rand u-turned, going from R17.03/$ to R17.24/$ in the afternoon trading session on Thursday. US GDP figures were released later that day and showed that the US economy had expanded above expectations in Q4, increasing by 2.9% for the final three months of 2022…

…however, personal consumption, the major contributor to the economy, showed a below-forecast 2.1% increase.

While the headline GDP figure does provide reasons for optimism, the underlying data shows signs of stress for US consumers whose salaries have largely failed to keep up with inflation…

… and the burden of elevated prices combined with decade-high borrowing costs points to a somewhat tenuous outlook for the economy. Is this the last quarter of solid growth before the delayed effects of the US Feds' aggressive rate hikes are fully felt?

It’s going to be interesting to watch this one play out.

Next week the Federal Reserve will communicate its latest policy decision, and there is already plenty of speculation over whether they may step off the pedal to a 25 basis point hike. The GDP data seemed to soothe some more fears over a deep recession in the US, and the upbeat tone extended to trading floors where most emerging economies rose…

…but not the Rand. The local unit remained above R17.20/$ by the close of trade on Thursday and looked set to end the week on a low note.

Meanwhile, in other news...

• As the conflict between Russia and Ukraine passes the 11-month mark, there’s been a new twist in the saga. Reports in the week suggest that reinforcements in the form of armour and Leopard 2 tanks are being dispatched to aid Ukraine. It would be a significant shift if it were to come to fruition, and one has to wonder what this would mean for NATO, the US, and its European allies, who Vladimir Putin has already warned if they were to interfere.
• After a 2022 to forget, stocks have been enjoying a strong start to the new year, and following the latest batch of US GDP results and corporate earnings, all three major indexes are headed for monthly gains. Last week, Dow Jones improved by 1.7%, S&P jumped 2.2%, but the week's best performer was the Nasdaq composite which gained 3.3% and remains on track for its best monthly performance since July last year.

After dropping to below R17.15/$ overnight, the Rand weakened against the dollar early on Friday, with investors evidently uncertain over what to expect from the risky local unit. With a slate of central bank rate announcements due next week, it seems that playing the waiting game is the likely strategy for most.

The Rand eventually petered out to end the week around R17.20/$, worse off than where it began.

The Week Ahead (30 Jan - 3 Feb 2023)

Here’s what’s in store over the next five days:

• SA - Balance of Trade (DEC), S&P Global PMI (JAN)
• US - Fed Interest Rate Decision, CB Consumer Confidence (JAN), ISM Manufacturing and Non-Manufacturing PMI (JAN), Unemployment Rate (JAN)
• EU/UK - GDP Growth Rate QoQ Flash (Q4), Core Inflation Rate YoY Flash (JAN), BoE Interest Rate Decision, ECB Interest Rate Decision

In light of the local issues present and the importance of next week's Fed interest rate decision, the clear reluctance by investors to adopt a directional momentum is understandable…

…especially when considering that the local unit has been significantly less buoyant than other currencies. Where to next for the Rand?

Come back next week to find out!

It’s a tricky time for local investors, but luckily our Elliottwave-based forecasting model is on hand to give us a guideline to navigate the road ahead.

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