Last week news was dominated by the supplementary budget in South Africa and the fear of a second wave of the COVID-19 virus emerging crippling markets again. In light of the risks it posed for the Rand, the currency held up well and has continued to trade in the R 17.00/R 17.50 range for the most of last week. The Rand traded range bound for most of yesterday and closed at R17.30 last night.
Starting with the supplementary budget, we are not going to go into great detail as the budget has been dissected to the nth degree. The main take away from the budget is that the South African economy, that has faced an uphill battle before, is going to have to climb the proverbial Mount Everest to right the ship again. COVID-19 only highlighted the problems that were already in the economy, and the remnants will continue to linger for a lot longer than we will care to remember.
On the COVID-19 side of things, the virus has seen a surge in positive cases with Emerging Markets like Brazil, South Africa, India and Russia joining the United States as the front runners of new cases in the world. This begs the question whether another lockdown of the affected economies will be enforced? The conclusion we draw is that a second wave will be another body blow for EM currencies and the Rand in particular.
Looking ahead at the data that will be released around the world this week, the most critical data set is the US non-farm payroll number. This time around it will be released on Thursday, as the US celebrate Independence Day on Friday. It will be interesting to see whether the disconnect between the initial jobless claims and the non-farm number continues in the June number as this will indicate that rehiring is taking place. Should the unemployment rate print under 10% it would be positive, but that could be a bout of wishful thinking.
Tomorrow the Fed minutes of the previous meeting will be released, and the market will be sifting through it with a fine tooth comb to see if there are any changes in the Fed sentiment. We feel that the minutes will not deviate much after the recent moves from the Fed and could be a non-event.
The South African data calendar has one big number out this week, and that is the GDP number for the 1st Quarter. We expect the number to come out at -1.4% QoQ and -0.5% YoY. As we stated, earlier, the economy was facing a battle and already on the back foot even before the COVID-19 pandemic hit.
Taking a step back and looking at the world economy holistically, the conclusion drawn is that it could be a difficult week for risky assets, especially if there is a surge in COVID-19 cases. The pandemic has retaken centre stage, with most of the data sets fading into the periphery.