June 27, 2023
MyCURRENCY News | Week 26 2023
What we know
The Winter solstice has passed, the days are getting longer, and we can only hope that the Rand’s darkest times are behind us.
As we often mention, hindsight can potentially make writing this commentary very easy and as we sit now, the all-time worst levels around R19.92/USD that were touched during late May / early June, seem a distant panic-fuelled nightmare. That’s not to say that we weren’t caught up in the widespread anxiety as sentiment around the country seemed to be almost uniformly negative. Indeed, with the state of the economy, rising interest rates, severe load-shedding and our alleged dealings with Russia coming under the global microscope, things were feeling exceptionally bleak.
As such, the 10% pull-back from 1 June (R19.92) to 16 June (R18.12) was incredibly welcome, even if the reasons weren’t necessarily that compelling (a narrowing of our trade deficit from -R170b to -R66b, a positive 3.4% manufacturing production number and a significant reduction in load-shedding). However, as we appear to be overshot to the upside, so too did that recovery seem somewhat overdone, as we pushed back out to R18.77/USD last week.
Our sense is that the market appears to have priced out the extreme fear regarding the consequences that severe Western sanctions (resulting from our Russia ties) could have, meaning that the pre-Ladygate range of R18.00/USD – R18.50/USD could potentially resume. We don’t think this is quite right, as the nature of our relationship with Russia will now remain in the spotlight and the Rand should have some kind of risk premium priced in accordingly.
Speaking of Russia, we seem to have had two successive April Fools events recently:
- Our President, along with other African leaders travelling to Russia to tell Putin to behave, became the somewhat farcical focus of attention. First the laughable idea that Putin’s world-view and future plans would be impacted in anyway by the 10-point plan that was presented, rendered the whole trip pointless from the moment it was first concocted. Next, we had the logistical incompetence of having reporters and security personnel stuck on a plane in Poland and unable to fulfil their respective duties. And finally, Vlad interrupted the talks after 40 minutes to give his view of things, the live broadcast ended, and that was that.
- The shortest coup attempt in history, as the World woke up on Saturday to news that the Wagner mercenary group, was seemingly preparing to shake things up in Moscow, putting a further spanner in the works of Putin’s already messy war. By the time Saturday evening came, that was done and Prigozhin was on his way to the relative safety of Belarus, tail between his legs. In a world of fake news and propaganda, it’s hard to know what actually happened that day or, indeed, what the implications for Russia may be going forward.
It’s been very quiet from an economic and data release perspective over the past two weeks. Data out of the major Western economies remain mixed, with the result being that the Fed and ECB have held rates constant, in the hope that inflation numbers have peaked. The big exception was the UK, where recent data has been more consistently strong and the market was caught out by a 0.50% hike by the BoE, rather than the expected 0.25%.
What others say
Business Tech – Interest rate relief back on the menu for South Africa
“Adding to the positive outlook is that the rand has also pulled back from R20.00/USD earlier this month, to around R18.30/USD, gaining somewhat on the better-than-expected CPI inflation data.
Bishop noted that with the implied point in the SARB’s model of R18.68/USD, and a lower rand exchange rate now, “gains in the US dollar will likely be positive for the SARB’s inflation forecast too, and so for its monetary policy decisions”
Reuters – US stocks slip, crude gains on Russia tensions, rate hike worries
“Market participants now expect the central bank to raise the Fed funds target rate by another 25 basis points in July, but the path beyond is less clear and dependent on economic data.”
IB Times – Russia crisis reveals ‘Real Cracks’ In Putin’s authority: Blinken
“Russia’s crisis involving a mercenary group’s aborted revolt against the Kremlin exposed “real cracks” in President Vladimir Putin’s rule, US Secretary of State Antony Blinken said Sunday.”
Moneyweb – Cash-strapped consumers place pressure on food producers
“Cash-strapped consumers having to tighten their belts, especially in the lower and middle-income markets, is putting South Africa’s major food producers under pressure and they will have to diversify upwards of the income scale to boost their bottom lines.”
What we think
In our last commentary we wrote that “…we are still cautious about being overly optimistic as the volatility in the currency is sky high at present…and that it would only be natural to bounce back somewhat…if we are able to keep loadshedding at bay we may be able to create a new trading channel below R19.00/USD”.
Economic releases will start to pick up again in the coming weeks, followed by what is traditionally a fairly quiet period as the Northern Hemisphere Summer moves into full swing. We would expect volatility to remain fairly elevated over the next month or so, as markets digest the data and position accordingly heading into the second half of the year.
Without doubt, any indication that the Fed is looking towards their first potential rate cut, would be a very positive Rand catalyst and the most likely reason to see a move closer to 18.00. On the other hand, the usual threats remain, load-shedding, Russia headlines and a local and US election next year ensure things will remain very interesting indeed.
Our range for the week: R18.20/USD – R18.70/USD.
Have a great week ahead.