Welcome back to another instalment of your favourite weekly Rand Review!

And what a week it was!

With very little economic data due in the week, the hot topic on local traders' lips was the eagerly anticipated State Of The Nation address that was scheduled to take place on Thursday evening.

While several crucial points were expected to be discussed by President Cyril Ramaphosa during the nation’s address, the undoubted main story would be the government’s plans to tackle the debilitating energy crisis that has grasped the country.

The Rand completely missed out on the January rally experienced by most emerging currencies and stocks, and following the previous week's blockbuster US labour report, we are now starting to see that rally fizzle out, with the Rand fading into darkness.

It was a tough week for the local unit. Here’s how it all went down.

Key Moments (6-10 Feb 2023)

These were some of the week’s top stories:

• New Energy Minister Incoming - After declaring the local energy crisis a national state of disaster, the President announced an unexpected plan to allocate (another) new minister within the presidency to focus exclusively on solving the crisis at hand. Who will it be?
• Mining Output Down The Shafts - Two of the country’s key contributors to the GDP, mining and manufacturing, suffered further contractions in December, marking an eleventh consecutive decline.
• Good News Is Bad News? - Several Fed officials lined up in the week, suggesting that there may be an extended period of high borrowing costs to come following the surprising headline job creation data for January.

After a disappointing end to January, the local unit looked as though it was in for yet another difficult month as local and international forces continue to drag on local economic improvements.

The Rand made a brief comeback in the previous week, but with the US labour market blowing expectations out of the water at the end of that week, the market’s hopes for a halt to rate cuts in the coming months has been tempered somewhat.

The local unit opened trade on Monday at R17.46/$, and it didn’t take long before the trigger effects of the strong US jobs data started to show on emerging markets…

…and by as early as midday, the Rand had already shot up to the mid-R17.60s, setting the tone for a difficult week ahead.

With fears already evident over the possibility of prolonged (albeit smaller) rate hikes, the focus shifted to the US, where Jerome Powell was set to address the media on the central bank's monetary policy plans for the foreseeable future.

On Tuesday, Powell confirmed those fears explaining that he saw this year to be one of significant declines in inflation but that it would only reach the 2% target in 2024!

Following his lead, several high-profile Fed officials reinforced the same narrative while also elaborating that as long as data continues to come in stronger than expected, then raising rates further will remain the likely order of the day…

…a classic case of “good news is bad news” for emerging markets.

In the main, traders are now expecting the Fed to surpass the originally expected 5% interest rate limit unless they can see sign real signs of the labour market weakening.

Stubbornly high core inflation, uncertainty around oil and other commodities, and geopolitical tensions have also been hotly debated topics in recent weeks…

…all of which may still play a huge role in the trajectory of the Fed's rate hiking plans.

As we’ve come to know all too well, the Achilles heel of the local currency is shifting risk sentiments, especially in the US…

…and following the downbeat tune from the Fed boss, the local unit wilted to R17.82/$ on Wednesday evening, its worst level since the 1st of December 2022.

We must say, we believe the Fed's sledge-hammer approach to managing the spike in inflation is doing more harm than good.

Firstly, with evidence of CPI already having peaked, and PPI YoY almost half what it was at its peak last year - with a downward trajectory that we haven't seen since 2008...

...with PPI MoM for December is sitting firmly in negative territory at -0.5%.

These are deflationary signals, not inflationary ones!

Secondly, the 2007-2008 financial crisis was following a period of similar increases in interest rates by the Fed, which eventually sparked a devastating collapse of an overleveraged financial system.

The financial sector globally is even more leveraged now than it was then...

...it is just a matter of time before we see another Lehman Brothers style event that will send shock waves through the market.

History repeating itself?

On Thursday morning, the local market was in a lull ahead of the President's speech as investors slow-played their hands, expecting the Rand to take on a more meaningful direction after the crucial SONA meeting.

Before that, though, Stats SA released the all-important local mining and manufacturing results for December, showing that growth prospects for SA dimmed further with significant contractions noted in both sectors.

Mining production recorded its eleventh consecutive month of contraction, dropping by 3.5% YoY in December, following a 9.2% decline a month earlier.

Platinum, gold production, and iron ore were the leading negative contributors to the overall decline, while coal output notched up by 8.4% in December, mainly driven by increased demand from Europe.

Meanwhile, the all-important but power-intensive manufacturing sector experienced its second consecutive month of declining industrial activity, slumping by 4.7% in December and finalizing a 0.3% drop for 2022.

The poor mining and production results merely added to the importance of the State of the Nation address that evening, with investors, citizens, and businesses demanding proper leadership to extricate the country from the crippling electricity crisis.

After what’s become the typical opening act at such meetings from the EFF and their almost inevitable removal from the Parliamentary House, the President proceeded to explain the eagerly-awaited plans of reform.

Hold on to your hats, folks; this one was an absolute doozy!

The National Disaster Management Centre (NDMC) took the decision to declare the energy crisis and its effects as a national state of disaster, to begin with immediate effect!

But wait, there’s more!

The President went on explain that the plan taken to deal with this crisis is to appoint a minister of electricity within the presidency to assume the responsibility of overseeing all aspects of the electricity crisis response.

Yes, you read that right!

So, to put it into perspective: Instead of decentralizing control and trusting market mechanisms, the NDMC has decided to incorporate another layer of centralization and reduced accountability even further.

It also means that there are now three ministries involved, Pravin Gordhan and the Department of Public Enterprises, which looks after Eskom; Gwede Mantashe and the Department of Minerals and Energy; and now a third ministry of electricity.

Needless to say, the decision left most onlookers gobsmacked.

How long until we have ministers of potholes or pit toilets?!

The official opposition party, the DA, was quick to make its feelings known, announcing that it would challenge the decision in court in the coming weeks as they feel that the decision taken is unparliamentary and exactly the opposite of what SA actually needs at this moment.

The President also outlined plans of action and reform for various other sectors, including policing, education, and social distress grants, but those largely fell by the wayside after the plans for the energy crisis were delivered…

…some may even argue that much of the balance of the address was a cut and paste of previous years' speeches filled with lofty promises and expectations but no concrete plan of action.

The Rand strengthened to below R17.60/$ ahead of the SONA, but as mixed reactions dampened investor confidence following the speech, the gains were quickly given back as the local unit slumped back to R17.80/$ overnight.

Meanwhile, in other news:

• A fresh bit of fuel was added to the geopolitical tension flame last weekend when the US shot down a suspected Chinese spy balloon that floated across the country for days. The decision was taken after the Biden administration claimed that the balloon was using surveillance technology capable of monitoring US communications - but yet took days before actually taking action.

  China had previously stated that it was a weather balloon that had been blown off course and hit back at the US, warning that the decision to shoot it down had seriously impacted and damaged relations.

• The UK managed to avoid falling into a technical recession (for now) after results in the week showed the economy experienced zero growth in Q4 of 2022. However, the monthly GDP data for December showed a 0.5% contraction, owing largely to strikes in the public sector and the lack of English Premier League football while the FIFA World Cup was taking place in Qatar. The BoE still believes that the UK will slip into recession this year, albeit a shallow one, and forecasts that it could last as long as five quarters.

On Friday morning, the Rand was poised for a fourth successive week of losses after already giving up over 4% to the greenback since the start of the year.

With investors still uncertain about the plans laid out by the country’s leadership to tackle the power crisis and the increased concerns over a prolonged hiking cycle in the US, the Rand was left to suffer the consequences.

After opening at R17.72/$, the local unit capitulated during the morning trading session, breaching R17.90/$ by early afternoon before closing the week in the mid-R17.80s…

…bringing an end to yet another dismal week for the Rand!

The Week Ahead (13-17 Feb 2023)

In a big week of economic data releases, here’s what will be dominating the headlines:

• SA: Inflation Rate YoY (JAN), Retail Sales MoM (DEC)
• EU/UK: UK Unemployment Rate (DEC), UK Inflation Rate YoY (JAN), EU Balance of Trade (DEC)
• US: Inflation Rate YoY (JAN), Retail Sales MoM (JAN), PPI MoM (JAN)

It’s already been a challenging start to 2023 for local unit investors, and what makes matters worse is that the longer-term outlook for the Rand remains completely unclear.

While a normalization in global currency markets has benefitted emerging markets, the local unit seems to be going in the opposite direction, which makes predicting the Rand’s path a daunting and dangerous task.

But, thankfully, we have our sentiment-based forecasting model which has stood us in good stead, helping us and our clients navigate the road ahead safely and confidently.

What’s in store next for the embattled local currency?

Come back next week to find out!

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To your success~

James Paynter