Can the rand sustain its gains?

Following the turbulence of the medium-term budget, the rand will be watched this week to see if it can sustain its recent gains against the dollar, while the latest manufacturing and mining production data will show if SA is benefiting from the more favourable global economy.

Mining and manufacturing production data for September will be released on Thursday.

Investec chief economist Annabel Bishop expects growth of 1.4% and 7.3% year on year in manufacturing and mining production, respectively, aided by higher commodity prices and the rebound in global merchandise trade.

However, though the global economy is picking up, Bishop noted that SA’s mining and manufacturing sector growth had been constrained by weak domestic demand.

The local Absa purchasing managers index improved in October, rising to 47.8 index points from 44.9 in September — its best level since May. However, the index has been below the neutral level of 50 for six of the past seven months, suggesting that the manufacturing sector is failing to expand meaningfully.

Even so, it appears that industrial production as a whole (mining, manufacturing and electricity production) will make a positive contribution to the country’s overall GDP growth rate in the third quarter.

BNP Paribas economist Jeff Schulz expects mining production growth of nearly 10% in the third quarter and for manufacturing activity to have maintained a modest positive quarterly growth contribution to third-quarter GDP.

This week, the rand will most likely take its cue from any further fallout from the medium-term budget (S&P Global Ratings has yet to issue a reaction), as well as signs that labour market pressure may be building in the US.

Towards the end of last week, the rand had managed to strengthen back below R14/$, which was positive from a technical perspective.

This followed an initial spike to R14.24/$ on Finance Minister Malusi Gigaba’s disappointing medium-term budget.

On Friday, initial jobless claims in the US will be released. Any sign that the US economy is heating up is likely to cause concern that the Federal Reserve will respond with more aggressive interest rate hikes than expected. This would be negative for the rand.

On the other hand, Jerome Powell’s nomination last week to replace Fed chairwoman Janet Yellen from February 2018 is considered broadly positive for the rand as he is expected to continue the modest hiking cycle communicated by Yellen.

In October, the Fed kept rates on hold but signalled that economic growth was robust enough for a hike in December.

Something extraordinary would have to happen to prevent a Fed hike in December, Rand Merchant Bank’s John Cairns said.