August 24, 2022
A year in review
It’s rarely ever smooth sailing for the Rand, and this year has proven to be no different. We started the year on the back foot, still recovering from our stint being red listed by most countries thanks to the Omicron variant. As a country with a healthy tourism industry, this of course was not a confidence inspiring event. Though, after a strong backlash from both the SA and international community, restrictions were lifted and we began our journey apprehensively into 2022.
After months of postering and rhetoric by Putin, the world’s debate of whether he would or wouldn’t was settled – as it turns out, he would and did. August 24th marks 6 months since the Russian offensive began in late February. It has not only shaken up the geopolitical scene, but also placed severe economic pressure on countries across the globe. The sanctions implemented by the US in the aftermath of the invasion have had far reaching consequences – undoubtedly hampering worldwide endeavors to keep inflation under control as it rears its ugly head again. With Russian oil and gas off the table for most of the world (bar those brave enough to ignore US sanctions), oil prices skyrocketed from $95/barrel to a peak of $131/barrel. This of course touches a sensitive nerve for South Africans after fuel price increases squeezed household budgets dearly.
The Eagle has landed
The writing had been on the wall for some time as US employment growth has been steadily declining since the last quarter of 2021. There too had been longstanding concerns regarding the exceptionally low interest rates in the US with fears growing around an overheating economy. The speed and duration of the economic recovery following hard lockdown was near unprecedented and as we know, all good things must eventually come to an end. It finally came to a head with the second consecutive negative GDP print this past month. No matter what angle you look at it from, the US is in a recession. Naturally, this is not good news for the global economy, regardless of whether you are aligned with the Western world or not as the effects trickle down throughout the global markets. With global investors looking to de-risk their portfolios during uncertain times like this, emerging market currencies like our own are left high and dry with funds seeking safe haven in the USD.
Inflation peaks our interest
The US Fed held their interest rate firm at 0.25% for 2 years during the worst of the pandemic with most nations, including ourselves, following suit. SA cut interest rates by 3% down to 3.5%. However, the SARB pre-emptively started raising rates as early as November last year against the backdrop of growing inflationary pressures and anticipating hiking from its international peers. The US missed the cue, describing inflation as transitory and only started their hiking cycle belatedly in March 2022. The SARB’s guidance has been steadfast throughout the pandemic and should be evidenced by our much less volatile inflationary increases when compared to the US. On that note, US inflation has been out of control, out pacing South Africa’s own by some margin. The US printed an eye watering 9.1% inflation number in June but has at least simmered to a ‘mere’ 8.5% in July. August’s inflation print along with their next GDP numbers will be very telling about where global markets are going next.
There are an infinite number of variables to consider when assessing global equity and currency markets and so the above points we have raised are in no way all-encompassing with regards to the driving factors behind this year’s FX movements. However, they are what we believe are key fundamental events with long lasting implications for global markets. It will be fascinating to see how we progress from here with regards to global recessionary fears and inflation on the rampage. If global markets can manage and minimise damage to their respective economies, it could form a solid base for a potential rebound in 2023.
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