What an interesting week we had last week, where the microscope shifted a little from international events and data and focused on South Africa for once. Last week, we had the budget speech and the anticipated grey listing of South Africa regarding money laundering. On the international front, a lot of focus was placed on the FOMC minutes and the Personal Consumption Expenditures (PCE) number out of the US.

Last week was dubbed the most important Fed minutes in recent history. This is because the US economy seems to be doing well despite the rampant interest rate hikes. The conclusion of the US Fed minutes was that the Fed members continue to see inflation as a problem and that the fears will only subside once a definite downward trend in inflation is observed. This only reiterated the Fed’s stance on hiking interest rates in the immediate future as a way to combat inflation.

FED Expectation for higher rates

We also had the release of the Fed’s preferred measure of inflation last week, with the PCE coming in hotter than expected (5.4% vs 4.9%).  The higher-than-expected number shows that, despite higher inflation, the US consumer is not backing down, which bodes well for the US dollar and gives the Fed some more leeway for further hikes. The fact that further rate hikes are expected only leaves a gap for a harder landing if all the lagging indicators have caught up to the present day.

Rand losing R1.50 in a month 

On the South African front, the South African budget was released last week, and much has been written about it in the past week. Overall, the rand found some encouragement in the budget as it fell to the R18.1000 level after the budget, which would have been a nice base to start looking at strengthening; however, the rand was halted by a stronger US dollar, grey listing news and other local factors.

A lot has been written about the fact that South Africa has been grey listed, but what does it actually mean? In short, the grey list is known as the “increased monitoring list”. This will require banks processing payments to and from South Africa to apply enhanced scrutiny to all payments. The Financial Action Task Force (FATF) will continue to monitor the country’s progress in implementing the additional measures, their effectiveness, and remedy the shortcomings. The effect thereof will be a bit more red tape with transactions in South Africa, damage of the financial sector’s reputation and could lead to companies exiting South Africa due to cross-border limitations.

This week the rand movements will be mostly linked to movement in the US dollar, and with US data at a premium at the moment, normally second tier data could disrupt the markets. Thus, a close eye needs to paid to the PMI’s numbers out of the US at the back end of the week. The most important data set out the week will happen in the Eurozone, with the inflation rate coming out on Thursday. This will be an important marker for the ECB in its next meeting.

The rand has looked rather vulnerable in the past couple of weeks and has lost around R1.50 in the past month. We are heading to the 2022 high of R18.55, and with the current movement, the rand feels toppish at current levels. However, giving the cautious nature of the market with anything Rand-related it will not surprise should the rand test the R18.55 level.