South Africa’s rand slipped this Tuesday against a slightly stronger dollar as lending data from the South African Reserve Bank (SARB) decreased for the third consecutive month.<\/p>\n
Reuters reported that the central bank’s lending indicator for February is a leading indicator for the business cycle and decreased by 0.7% month on month.<\/p>\n
The indicator collects data on vehicle sales, business confidence, money supply and other factors to gauge the outlook for the country.<\/p>\n
On top of this, the dollar index, which measures the greenback against six rivals, was up roughly 0.1%, adding pressure to the rand.<\/p>\n
The rand remains volatile and at the whim of the global economy, specifically decisions made by the US Federal Reserve.<\/p>\n
According to Reuters, global investor sentiment has been cautious in a busy week for corporate earnings and economic data – combatting the risky rand.<\/p>\n
Investec’s chief economist Annabel Bishop said that markets continue to worry that the US will fall into recession in the second half of this year as its interest rate hike cycle overshoots.<\/p>\n
“With at least a two to three-quarter lag between interest rate changes and the impact on the economy, further, US hikes are entrenching recession concerns,” Bishop said.<\/p>\n
Bishop reported that last week’s US Purchasing Managers’ Index (PMI) showed stronger demand conditions supported sharper growth in April but also brought renewed inflation momentum.<\/p>\n
“Output rose at the sharpest pace for almost a year, as stronger demand conditions, improving supply, and a steeper uptick in new orders supported the expansion. \u2026 The increase in output was the third in as many months.”<\/p>\n
“In the US, core CPI inflation (CPI excluding food and energy) rose to 5.6% y\/y in the latest print, up from 5.5% y\/y, obdurately high, and the PMI data raised some concerns it would further support Fed hawkishness. The core PCE deflator is due this week,” Bishop said.<\/p>\n
Rand impacted by US uncertainty<\/strong><\/p>\n Over the past year, South Africa’s rand weakness has been driven by increased uncertainty and downgrades to the global economic outlook.<\/p>\n Financial markets are factoring in almost a 100% chance of a 25bp hike in the US next week. At the same time, expectations of a recession are a lot lower, at 44%, according to NABE (National Association of Business Economics), said Bishop. Uncertainty is elevated.<\/p>\n Despite this, Bishop said that even if uncertainty is elevated, another sharp depreciation in the rand is not what is expected from financial models.<\/p>\n “With global risks, and particularly a meaningful chance of US recession factored in (although likely not fully), the rand remains at risk of further weakness but is not expected to lose another R4\/USD over the next twelve months<\/strong>.”<\/p>\n US Recession<\/strong><\/p>\n According to the National Association of Business Economics (NABE), the likelihood of a US recession has decreased from 54% in January to 44%.<\/p>\n Forbes’ recession tracker, however, shows that various data points are drifting into neutral territory, which could indicate a possible recession. Factors such as GDP growth, inflation rates, and unemployment rates are playing a crucial role in determining if a recession will occur.<\/p>\n While the US business cycle is expected to slow in the second half of 2023, it is uncertain whether it will lead to an NBER-defined recession. Global financial market risk perceptions will also impact the situation, said Bishop.<\/p>\n The rand is currently trading at:<\/p>\n