Across the world, we’ve seen riots and protests; in France, protests against the introduction of Covid passports by Emmanuel Macron and locally the significant social disruptions with widespread protests and looting. What started because of the arrest of ex-president Zuma, we believe was just the spark that ignited the fire, as South Africa has been in a downward spiral for many years, with the ruling party failing to address high unemployment and structural economic problems. And this boiled over. The violence, of course, will not make the problems go away but shined a spotlight on the issues we face if we want our economy to grow in the future.
In the past, we’ve stated that local issues hardly have any meaningful impact on the rand because of the US dollar stature, but last week we saw that a sudden knee jerk in the rand is only one very bad local headline or event away.
The rand spiked to the R14.80 level as we feared for the worst during the looting and unrest but clawed its way back to the R14.50 level as the Government deployed the Defence Force to restore some peace in the affected areas.
With all the commotion in South Africa, it was easy to only focus locally and not on the global currency market as well; however, if we look at the US dollar moves, we saw that the US dollar slowly but surely traded firmer to 1.18 level against the Euro. The release of inflation figures in the US came in at 5.4% for June, higher than the expected 4.9%. This, in turn, led markets to believe that tighter monetary policy might be on the cards, with the FED perhaps printing less money. The President of the ECB, Cristine Legard, also reiterated that the ECB would keep their monetary policy accommodative even if inflation rises above the 2% level. This meant that the ECB is more dovish than the Fed and thus caused the Euro to lose some value.
The doldrums that most markets were in during the past week, we believe, will continue as very little meaningful data will be released this week. Locally, we have our MPC meeting tomorrow but don’t expect any change in interest rates. It will, however, be interesting to see what the Reserve Banks’ view on inflation going forward is, and if the current 25bps hike that the market has priced in Nov 2021 will materialise.
On the local front, an uneasy peace is currently the status quo, and we need to keep an eye on international developments to gauge currency movements. For now, we believe the currency trading range for the rand to be between R14.25 to R14.75.