Welcome to this week's edition of the Weekly Rand Review.

While Saffers geared up for the Springboks and Proteas' big clashes last week, the Rand was up to its usual tricks again, keeping backers up at night with uncertainty.

Lucky for our subscribers, though, they were able to sleep easy as our forecasting system continued to keep us ahead of the game on Rand vs Dollar, Euro and Pound, with an imminent bottoming out being expected, per the Euro/Rand forecast below.

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In a week where economic data locally largely took a backseat, the Rand danced to the tunes of international sentiment...

...shaped by events both economic and geopolitical. With each passing day, the ongoing conflict in the Middle East grows as a major factor shaping economic and geopolitical balances worldwide…

…and against this backdrop, the US dollar and assets are seemingly appearing as a beacon of safety for investors, casting a shadow over emerging currencies, including the Rand. While the week witnessed limited economic data releases domestically, the Rand found itself in the crosscurrents of global events, once again reinforcing the interconnectedness of currencies in the modern financial landscape.

And with that, let's get into the review!

Key Moments (16-20 October 2023)

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

• SA Inflation -Stats SA released the most recent CPI data on Wednesday, revealing a sizeable jump in headline inflation in September, up from 4.6% in August.
• Retail Sales Slump - South Africa’s all-important retail sector experienced another drop in performance year-on-year as consumers continue to feel the pinch at the till.

On Monday, the Rand gained strength in early trade, propelled by tensions in the Middle East that supported the price of oil and subdued the performance of the dollar. After an explosion at a Gaza hospital led to calls for a humanitarian ceasefire, an agreement seemed to be reached for the creation of a safe corridor in the southern part of Gaza…

…which was intended to facilitate the entry of humanitarian aid and allow individuals with international passports to evacuate via Egypt. In addition, the summit between President Biden and Arab leaders was cancelled, dimming hopes for a peace settlement in the region.

The local unit improved from the week's start at R18.95/$ to hit the high R18.70s triggered by local inflation results, with Jerome Powell’s speech expected to dominate the spotlight later in the week. After trading sideways for most of the first half, midweek proved much choppier as US treasury yields hit a 16-year high on Wednesday…

…boosting expectations that the Fed were becoming increasingly likely to keep rates higher for longer.

Robust US retail sales data also added to the surge in US bond yields, with the two-year yield reaching a 17-year high at 5.21%. Later that day, Stats SA unveiled the latest CPI data, revealing a notable increase in headline inflation, rising to 5.4% in September from 4.6% in August.

While the headline CPI is still within the SARB’s target range of 3%-6%, there are concerns that it could push higher later in the year, which will keep the MPC on their toes.

Additional upward monthly pressure to inflation can also be expected due to the significant increase in fuel prices in October…

…while the avian flu outbreak, which has predominantly impacted the egg supply but is anticipated to extend to chicken, is another cause for concern.

The inflation rate for food and non-alcoholic beverages saw a slight uptick, rising from 8.0% in August to 8.1% in September, reversing five consecutive months of decline. The effects of inflation became evident once more in the week when Stats SA published its latest retail trade data report revealing a 0.5% YoY contraction in sales in the sector for August 2023.

Among the primary contributors to the decline were general dealers and hardware, paint, and glass retailers, which saw a significant drop of 3.8% and 5%, respectively. However, SARB has provided the strongest indication to date that it will refrain from initiating interest rate cuts before the end of the year.

But back to the Rand...

After dipping lower early Wednesday, the local currency reversed strongly and broke back above the psychological R19/$ by mid-afternoon...

And our Wednesday evening update confirmed that more Rand weakness was on the cards...per below USD/ZAR forecast:

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And it didn't take long to happen...

...as the Rand weakened further on Thursday as US Treasury yields continued to soar ahead of a speech by Federal Reserve Chair Jerome Powell.
In his speech, Powell seemed to be in agreement with fellow Federal Reserve members who suggested that the bond market is now assisting the central bank in its objectives. He acknowledged "in principle" that the increase in yields is contributing to the tightening of financial conditions…

…and, to some extent, could reduce the necessity for additional rate hikes by the Fed. Additionally, he noted that if bond investors were increasing long-term bond yields solely due to the expectation that the Fed would raise its short-term policy rate…

…then the central bank would be compelled to follow through with the rate hike, or else long-term rates would decline!

A sticky wicket indeed.

To sum up, the Fed boss walked a fine line, acknowledging the potential necessity for further rate hikes due to the unexpectedly robust performance of the economy. However, he also highlighted emerging risks and emphasized the importance of proceeding cautiously.

So nothing really ground-breaking on that front.

Meanwhile, in a bit of good news for Saffers:
According to energy analyst Pieter Jordaan, who tracks Eskom’s data points to provide context around current fleet performances…

…Eskom's weekly energy availability factor (EAF) is, for the first time this year, surpassing the levels recorded in the same period of 2022 and 2021.

Hurrah!

However, he did add that the major reason for the improvement is due to lower demand and a significant increase in rooftop solar, rather than due to increased energy supply. Nevertheless, it seems likely that the lights will stay on this weekend and the Rand headed toward the end of the week a shade below R19/$ on Thursday’s close of trade.

Then in other news:

• According to forecasts from the International Monetary Fund (IMF), South Africa is poised to briefly surpass Nigeria and Egypt as the largest economy in Africa next year. The IMF's World Economic Outlook projects that South Africa's gross domestic product, based on current prices, will reach $401 billion in 2024, exceeding Nigeria's $395 billion and Egypt's $358 billion.

  However, this leading position is expected to be temporary, with South Africa expected to hold the top spot for only a year before falling behind Nigeria again and eventually dropping to third place behind Egypt in 2026. Despite Nigeria's economy surpassing South Africa's since 2018, challenges such as a decline in oil production, runaway inflation, and a devaluation of the naira have affected its economic prospects.

• In September, UK inflation unexpectedly held steady at 6.7%, defying predictions of a further increase. The results were attributed to surging fuel costs offsetting the first monthly decline in food prices in two years. The pressure on households was underscored by the ONS, which indicated that the significant increase in petrol and diesel prices accounted for nearly all the upward pressure on the inflation rate, driven by a sharp rise in global oil costs in recent months.

On Friday, the Rand was forced backward early and was trading right within our predicted target area at R19.14/$ before reversing late in the day to pull back below the R19 mark…

…however, the gains weren’t long-lived enough to register a net positive week, as the local unit ended the week slightly above where it began.

The Week Ahead (23-27 October 2023)

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

• SA: PPI YoY (Sep)
• EU/UK: UK Unemployment Rate (Aug), ECB Interest Rate Decision
• US: PCE Price Index YoY (Sep)

As we head into the final full week of the month, the Rand will likely get triggers shaped by events abroad again, with limited local data expected…

…but as always, it is the underlying cycles of sentiment that will dictate the direction and strength of move - which is where we come in.

We’ll be back next week to tell you all about it.

Until then, safe trading!

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To your success~

James Paynter

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