As we all sat in a daze on Saturday after the loss to Ireland, one could not escape the similarities between SA Rugby and the current state of our economy. Firstly, we preach a strategy of defense on all accounts, with the Reserve Bank trying to stop inflation creeping through gaps and the Springboks trying to stop 14 men that we forget what to do on attack.
Granted we do not have a lot to attack with in both instances some tailoring in principles could help us unlock some opportunities and bring some light to an already dimly lit room. A wider focus could have seen some of the possibilities in different areas, much like a skilled team who has more than one game plan.
Secondly, we had a change of coach in both instances, which for that point in time saved us from certain doom. The coaches went into the implementation of their respective plans, wooing rating agencies and journalists and making the right sounds and the right times.
The effect on the public was enormous; people was buoyed by South Africa not being downgraded even the Rand looked shiny as it was the best-performing currency in the world and the same could be said about the first starting lineup of the year. It felt exciting, it felt new, the sense of newness was overwhelming and for a moment, we have thought we have turned the corner.
Alas, when it came down to the nitty gritty, a combination of failed structures and policies hit us like a ton of bricks, shaking us back to a sense of practical reality. The first sign of cracks in our rugby team was that the structure was based on an old foundation, in that none of the innovation and promised gusto was delivered.
In our economic structure the poor GDP print needs to shake us to reality, the hopes we pinned on mining and agriculture, were decimated, with low commodity prices and a drought. Growth declined by a shocking 1.2%, in the first quarter and with two negative quarters it technically means a recession, and the fire needs to be stoked in the second quarter.
The counter argument is that everybody is struggling, which is not the case, those who have adapted to conditions as they are at the moment, are still managing to survive; take a look at Germany and the US.
Luckily for both the Springboks and the SA Economy there is some opportunity for redemption. For the Springboks, it is this Saturday, and for the South African Economy, we will see at the mid-term budget speech whether the changes promised by Coach Pravin will have had the desired effect and steered our economy back into some respectability.
In the rest of the world, last week was mute as the market tried to make sense of the weak non-farm payroll numbers and repositioning themselves for the US FOMC meeting happening this week. After puffing out their chest last month and sounding hawkish about a rate lift-off, the non-farm numbers has put an emergency brake on that decision. The number could be very subjective as it is impossible for the US non-farm payroll number to rise by 200,000 jobs every month and it could be the mere shock of the number that caused markets to re-think the US interest rate decision.
There is enough doubt in the US economy that this week’s FOMC meeting, will probably result in no change in the US interest rate, but more attention will be paid to the forecast by the Fed and whether they have significantly changed the proposed path of their hiking cycle. This will be an interesting meeting as less than a month ago there was more than a 50% chance of the Fed hiking rates. This sudden shift in sentiment will result in a volatile market once the press statement is released.
A new fear entered the market toward the end of last week, and that is the possibility that Brexit will become a reality. At the start, Brexit was seen as likely as Donald Trump becoming President of the US, so anything is possible on the 24th of June when they hold their referendum. Friday’s action was typical in times of uncertainty when most people turn risk-averse, and all risky assets are driven on the back foot, as we saw all the major indices and EM currencies losing ground.
Apart from the US FOMC on Wednesday, the South African current account figure gets released today and expectations are that the deficit has narrowed on the back of the trade data being better than expected in the past few months. There is also a possibility that the number might miss to the bottom side, and that could see the Rand react negatively. The current account deficit is something to be addressed as South Africa is running twin deficits and history has taught us that developing countries that run twin deficits don’t fare too well.
The expectation is for the week that the Rand could stage some comeback if the current account deficit and Fed Chair Janet Yellen comes to the party. Should the deficit come out bad and Yellen remain hawkish don’t be surprised if the Rand ends the week above R15.50 otherwise a break below R15.00 should pique the interest of importers to start buying some cover.
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