Rand holds it’s own against dollar – but for how long?

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Another week, another fascinating 5 days of market activity amidst global uncertainty. The Rand is going through a most interesting period of trade, where we are seeing a disconnect between the enormous gains of the Dollar, and the lack, for want of a better word, of weakness in the Rand.

So while the Rand did have a tough week, the market activity did not quite play out the same way as many economists were expecting.

So with all these interesting trends playing out, we cannot go too far without thinking of the Russia/Ukrainian conflict, which once again dominated the headlines for the 5 days… but lets take a deeper dive into all that happened, and it’s effect on the markets.

Hopefully it can give us some insights for the days ahead!

Key Moments (28 Feb – 4 Mar 2022)

So getting into the week, here were the biggest headlines apart from the Ukraine conflict:

  • Energy & Agricultural Crises – the Ukraine/Russia conflict has enormous repercussions wider than what was first anticipated, and many markets stand to be hugely affected…
  • Dollar Strength – conflict and uncertainty always drives investors back to safe havens, and these last couple weeks have been no different as we have seen the returns of the secure stores of value…
  • Oil Sky-Rockets – the collapse of oil to sub $0 just 2 years ago seems like a distant fantasy, as the implosion of the oil market the last couple weeks has seen $110+ a barrel!

So to start with the opening of the markets, there was a hope heading into the weekend that we wouldn’t have a second week of conflict…

…this was not the case, and come Monday morning with the USDZAR market opening at around R15.10 in the early hours of Monday morning, the first hour of trade (12am-1am), saw the market explode to R15.30, and early in SA’s business hours, we were up over R15.40.

Uncertainty is what markets hate, and there hasn’t been a time of more uncertainty probably since the beginning of the pandemic.

This poses a lot of queries for whether the global economy can sustain another crisis like this, as the effects of the conflict in Eastern Europe are a serious cause of concern!

As many people are learning, perhaps the biggest 2 side-effects of the countries of Russia & Ukraine being at war is Energy & Agriculture.

Russia produces an astounding amount of oil every day, and is a country rich largely as a result of it’s exports, producing more oil than Saudi Arabia back in 2020, and still in the top 3 of all Oil production today.

Ukraine on the other hand, is the bread-basket of the Middle East, and accounts for 25% of the global exports of wheat. This affects everything from bread, cookies and noodles.

By Friday, wheat prices were around 40% up. For a country like Egypt, this is disaster with Russia and Ukraine delivering 86% of their imports of wheat in 2020.

So what you have developing is:

  • An energy crisis, as oil prices sky-rocket to upwards of $110 a barrel
  • An agricultural crisis of some degree, as staple foods like bread are set to increase in cost drastically
  • Coupled together with the already disastrous supply chain situation, makes for the perfect storm

The fact is that if Ukraine’s crops are wiped out, and Russia has such a fallout with the rest of the world that it affects oil production, there is not time with supply chain issues to find other solutions to such enormous players in both these markets.

It is no wonder that we have seen the uncertainty of investors as considering this overall big picture, and this has seen them scuttling to safe havens like the Dollar and Gold:

The interesting thing about the Dollar market as shown above (Dollar Index, the Dollar against a weighted basket of currencies), is that while we have seen some of the largest gains since 2 years ago at the pandemic’s inception, this hasn’t translated into massive losses for the Rand.

The rest of the week largely played out with the Rand rangebound against the Dollar, failing to break free of the R15.55-15.15 levels. But if we take a step back and look at the overall picture, the last few weeks of market activity have been nothing short of fascinating…

If we take a look at this compared to the above DXY, you will see how the Rand has really held it’s own compared to the overall losses of other markets against the Dollar, the Rand has been really resilient! But for how long can it hold on…?

And then in other news:

  • This conflict has really drawn the lines as to who stands with who, as the UN voted on condemning Russia’s invasion of Ukraine…and SA’s government has shown where it stands, abstaining from the vote. Failure to condemn Russia’s attack shows clearly that the SA government aligns itself with China and Russia, not the West. While this does not come as a surprise as it has often been the sentiment that the government has given off, it is nevertheless now there for the whole world to see.
  • Fuel prices are a serious concern in March, as the effect of sky-rocketing oil prices and warnings of worse to come has seen big increases around the world. With SA already enduring record high prices, the pain looks set to increase, and the AA has warned as much, as even with prices set to rise over R21 for the first time ever for 95, expectation was that worse was coming soon…
  • Friday brought further advances by Russia, as it was reported they had taken Europe’s largest nuclear energy plant in Ukraine amidst conflicting reports of potential damage to the plant being averted, this coming after a second round of talks had not resulted in any cease-fire agreement.

And then to round off the week, US Non-farm Payrolls or February came in at 678k – the highest in 7 months and well above the 440k expected by analysts, with unemployment also dropping to 3.8%

This was a trigger for the Dollar to push still higher, and push the the Rand to around R15.40 come SA close for the day before strengthening a bit thereafter, which was not bad at all considering how the week had begun, and other markets had faired.

And against the other majors, the Rand had faired even better, pushing stronger against both the Euro and Pound. The Euro itself had taken a hammering, breaking below $1.09 for the first time since 2020, as the markets continued to be swamped with volatility and uncertainty. There was more in this week than we could ever encapsulate into one short review email, but hopefully this has given you a little insight into something of what transpired…!

The Week Ahead (7-11 Mar 2022)

Well, it has certainly been a case of March madness already, what does this week hold in store?

There are a few data releases of not this week, among them being:

  • SA – GDP Growth Rate, Current Account
  • US – Balance of Trade, Inflation Rate, Jobless Claims

But clearly the Russia & Ukraine conflict and the global implications will continue to be in the headlines, as tensions continue to increase globally as to where this is all heading.

As for the Rand, it has held its own in a remarkable way do far, but or how much longer can it do so? The next few days could be interesting…

To your success

~ James Paynter

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