“Two roads diverged in a wood … I took the one less travelled by, and that has made all the difference.”       – Robert Frost 

The quote does talk about two roads diverging, but for few of the major central banks its just one with a question on timing of when to begin the journey on the road. 2024 looks set with a series of major events for the financial markets with numerous random & uncertain changes at fore, difficult to predict. Yet we tend to engage in this activity of outlining the probable outcomes. Quite interestingly it can definitely help provide a map to taking into consideration major narratives to traverse through this maze with some guidance in the background. Considering this following are the narratives expected to be at play for the next few months of 2024. 


Democratic Abundance! 

More than 30 democracies are scheduled for elections in 2024 with larger nations like India, US & Indonesia also contesting. Although discussions around stability of govt. and re-election of the incumbents for the Indian nation have gained prominence over the last couple of months, it’s the US elections which are seeing quite interesting set of developments. Volatility which was bit subdued during the end of 2023 should see some pick up in the current year with further more developments in the political landscape. 

 
 
 
 
Central Bank Conundrum! 

Steadily falling inflation and slowing economy has prompted FED to turn dovish on monetary policy and the dot plot indicates up to 0.75% rate cut in 2024.  Since then, market expectation of rate cuts has risen to 1.5% this year.  Rate cuts of this magnitude can happen only in case of a financial crisis or a big slump in the U.S. economy.  What FED is trying to achieve is a soft-landing and avoid a recession in a crucial election year. At the same time, they would not like to ignite fresh rise in inflation by hefty rate cuts (unless necessitated by a crisis).  

Central banks have repeatedly impressed on their dependency to data for their actions leading to participants closely following the labour markets, wage growth and the numerous variations of inflation indicators. Concerns around the impact of recent rate hikes not being seen thoroughly places attention towards the debt refinancing and maturity in the shorter term – to identify the possibility of further slowing of economy. 

Though 20 major central banks are expected to cut rates this year according to economists – central banks still weary a repeat of 1970s i.e. cutting rates prematurely leading to second round of inflation – thereby keeping pace slower than expected. 

 
 
The global financial markets would see a lot more of other factors like China performance, Euro zone recovery, Geo-politics and other thing – but it’s the policy & the politics which is expected to set the general trend for the year.  
   
USDINR   

India was once assumed to be a key member of the ‘Fragile Five’ with many major banks terming it to be one of the vulnerable emerging economies. Recent discussion seems to have quite a distinguished view for the nation compared to the ones mentioned earlier. India has been one of the hotter destinations for the flows to have arrived along with consistent expectations of outgrowing global economies in terms of pace in the coming years. 

Expect Rupee to perform better in first two quarters due to: 
Huge inflows expected to the Bond market 

Current expectation of stable Government returning to power in May likely to boost investments 
FDIs – which have been underwhelming in 2023 is expected to pick up as India continues to grow faster and stable government attracts long term investors 

Dollar Index is expected to be soft into the CY Q2 considering expectation of Fed Rate Cuts 
Lower oil prices are expected to sustain which shall help keep the nations external deficits at manageable levels 

 

Expect Rupee to weaken in second half of the year due to: 

Dollar Index is expected to gain once FED cuts rates, but expect them to undershoot market expectations 
India’s high growth will keep imports on the higher side and persistent deficits will necessitate keeping the Rupee weaker 
RBI expected to cut rates in the second half of the year; this should weaken the Rupee 
Indian assets are expected to see some correction with valuation concerns dominating 
 
 

INR historically weakens 3 – 3.5 % p.a. on average in a longer-term horizon due to its structural deficit.  This did not happen in 2023 due to RBI arresting it with inflation concerns. Although INR is expected to appreciate in the first two quarters, it’s the consistent imports, slowing economies revaluation of assets and dollar strength which may bring in depreciation for the Rupee by the end of calendar year. 

 

TECHNICALLY, initial down move can see the Rupee hit Rs. 82.00 or Rs. 81.50 levels against the dollar.  
The subsequent weakness can be expected to move it higher towards Rs. 84.50 levels towards year end.   
 
Dollar Index 

If the US economy does achieve a soft-landing while at the same time market expectation on rate cuts is moderated, it will support the Dollar by making investments in the U.S. assets attractive.  As mentioned earlier – the U.S.  goes through elections this year with a lot of uncertainty as to which political disposition will have the edge Given this background, expectation of the Dollar moves during the year- Dollar is expected to weaken further into the Fed rate cut beginning Slowing of the economy should further put pressure on the strength for dollar  As their actual actions undershoot market expectations, can expect Dollar to regain strength later Lingering geopolitical uncertainty and continued strain in U.S. China relations will keep the global trade on uncertain footing.  This will be supportive of the Dollar as a SAFE HAVEN Policy uncertainty due to upcoming elections in the U.S. will be detrimental to risk assets globally Thus, initial period of Dollar weakness should give way to Dollar strength in the second half of the year.   

 

MEDIUM TERM: However, medium-term view of Dollar is one of more weakness due to (a) precarious fiscal situation in the U.S. which will eventually lead to a depreciation of the Dollar; (b) ongoing diversification or de-Dollarization of the Dollar is an underlying factor to keep the greenback weak. 

TECHNICALLY, initial weakness will see the Dollar Index drop to 98.00 or slightly lower.  However, after that it is expected to have a rebound to 105/107 levels.  In other words, a drop in Dollar by another 4% from the current level of 103 should be followed by a strong corrective rebound.   EURO Broadly Dollar moves are determined by the trends in EURO which has maximum weightage in the DXY.  EURO has displayed distinct bullishness since the low of 0.9535 seen in September last year.  It can be gauged from the fact that all through 2023 and till now, EURO Zone economy has underperformed the US counterpart and its yields have been lower than that of U.S.  The largest Euro Zone economy, Germany has seen a technical recession while the Region as a whole has recorded a negative growth in Q3.   

Euro has derived its strength from Central Bank diversification of reserves and also structural short position in the single currency being unwound.  EURO’s gain of 1.6% on a YOY basis does not look significant, but its recovery of over 15% from the multi-year low speaks of the massive short-covering that investors have done.   

Another factor supporting the Euro has been that while the FED has gotten dovish recently, ECB still remains glued to HIGHER FOR LONGER rates notwithstanding the weak growth picture.  However, this is likely to change in the coming months as inflation in the Euro Zone has been falling faster and it is a matter of time ECB turns dovish too.  In fact, markets have been discounting over 1% rate cut during the year for EURO starting in the second quarter of 2024. Once the ECB starts to align with the market, EURO reversing some of its gains can be expected.  Elections in some of the member countries, viz. Austria, Belgium and Portugal, even as political set up in other countries are not very strong can bring in some volatility.   Even the European Parliament is set for elections this June.  

TECHNICALLY, EURO has an upside potential to 1.1250 or even 1.1500, before it retraces towards 1.05 in correction.  However, medium term outlook for EURO is strong.   

Sterling Pound/GBP: 

Just like the EURO, UK Pound benefitted from the market’s structural short position being unwound and it posted even better grain of 3.5% on YOY basis.  The massive short position in Pound was the reason why market ignored the weak performance by the economy, although the big rise in interest rates and the restoration of fiscal credibility were reasons too.  Recently, inflation in UK also dropped quite heavily (from peak of 11.1% in October 2022 to 3.9% in November 2023), after which slightly dovish voices from the Bank of England members were heard.  Market expects the Central Bank of UK to start cutting rates in Q2 of this year, though the Bank continues to push against such expectations.   
UK also goes into general elections in next one year, although Prime Minister Rishi Sunak is not obliged to call an election until 17 December 2024, exactly five years since the last one took place.  After many years, the incumbent Government has to deal with many issues like rising cost of living, high inflation and record interest rates, while the latest data shows GDP contracting in Q3.   
Given this background, UK Pound is in for a period of underperformance both against the USD and the EURO in the coming year, though it will generally track the fortunes of the broader Dollar.   
Technically, Pound will find it difficult to gain beyond 1.32 this year, while subsequently a drop towards 1.20 is not ruled out tracking the Dollar strength.   

The Japanese Yen 

Yen is likely to strengthen in the year due to-  FED’s dovish posture resulting in rate cuts;  gradual reversal of easy money policy by the Japanese Central Bank;  Unwind of carry trades as other Central Banks like ECB and BOE cut rates later in the year;  Japanese markets possibly outperforming an attracting foreign funds into the country Monetary policy change in Japan is overdue as their inflation has stayed well above target for long and expected to inch up further as wage revisions take place.  BOJ has also linked their policy change to rise in wages.   

Technically, dip towards 136.70 or even 133.70 appears likely as in a large correction to an uptrend. The quarterly chart’s structure suggests that a dip to 130.75 is also not ruled out. Resistance near 149/153 to cap any upside attempts by USDJPY.  

The Chinese Yuan 

Chinese Yuan was a stark underperformer in 2023, weakening as much as 5.5% against the USD.  Main drivers were the widening rate differentials with the U.S. (FED raising rates and China cutting rates), sharply weakened Chinese Economy, large outflows from investors and fall in their exports on YOY basis by 2.5%.  However, due to persistent efforts of Chinese authorities, weakness into new lows was averted and the currency recovered towards close of the year with some green shoots observed in the economy.  Although China’s equity composite index probed new lows in the beginning of 2024.  
Outlook for the Chinese economy is better for 2024 as lagged effect of various policy moves and supports start to reflect.  Barring a slump in global trade, worsening of their relations with the U.S. and geopolitics China should see better year and that will be seen in the currency as well.   

One alternate scenario for China cannot be ruled out.  As we all know, China disappointed with its recovery vis-à-vis expectations post Covid relaxations.  Despite the many measures taken by the Government/Central Bank, the economy and the markets have failed to respond positively.  Following points are notable- Chinese Shanghai Composite is near Covid lows in stark contrast to global composite Index which has almost doubled FDI into China fell into negative territory last year for the first time since records began in 1998 Chinese Yuan fall of over 7% matched that of the Yen which carries negative policy rate  whereas the DXY itself was lower by nearly 2%.   

 

The problems in Chinese economy are structural in nature rather than being cyclical.  Hence, it is another probable situation that China may adopt a bold move to cut their rates big and allow the Chinese Yuan to fall (which they have been resisting so far).  In such case, Yuan can fall to 7.50 or more against the USD.   
Technically, charts show that the underlying uptrend could undergo a correction by dipping towards 7.02 (minimum) or even to 6.85 area in the coming 6 to 12 months’ period. Resistance is near 7.22/7.28 and a farther one at 7.34/7.37. Rise above 7.37 shall bring in another round of weakness for the CNH against the dollar. 
 
GOLD 

The precious metal has performed strongly in 2023 rising 7% on YOY basis, helped by falling inflation rates across economies, policy rates expected to be slashed by the FED, consistent Central Bank accumulation of gold and Dollar diversification.  This trend is likely to continue into 2024 as other major Central Banks in UK and Europe get dovish and cut rates.  The structural weakness of USD due to their extremely weak fiscal position adds to attraction of gold.  Further compression in real yield would further boost the overall attractiveness for the yellow metal. 
 
Technically, charts continue to appear bullish for a rise to 2250. Supports are near 1980/1970 and a deeper one is at 1920. Fall below 1920 would lessen the chances for the expected rise. Sustained break above 2080 USD means that gold has ended its 12-year consolidation phase (1920 was seen in September 2011) and coupled with break of FOUR TOPS AT 2070-80 RANGE could lead to big gains for the metal.   

Conclusion: To sum things up – Geo-politics shall play a important role in adding uncertainty to the financial markets this year. Central banks would try sail the ship through this uncertainty of geo-politics, historically instances of another round of inflation, slowing economy and heavy fiscal situations. 
The expectations mentioned in the report are expected to help navigate in the next couple of quarters with further guidelines & directions to be evaluated over time. 
 
Prepared by: 
Mr. Jayaram Krishnamurthy, 
Co-Founder and COO – Almus Risk Consulting LLP 
 
Mr. Shikhar Garg, 
VP – Treasury Markets – Almus Risk Consulting LLP

As expected, the MPC kept all the policy rates unchanged and retailed the monetary policy stance as one of “withdrawal of accommodation” 

GDP:  

Growth expectation for FY 24 upped to 7% from previous 6.5%.  This was to be expected after the strong growth momentum we observed in Q2 number announced last month.  The Governor also pointed out that private consumption should gain support from gradual improvement in rural demand.   He also said that drag from external demand should also moderate.  These should be a boost higher growth too. 

Inflation: 

RBI kept their inflation expectation for FY 24 unchanged at 5.4% in the background of uncertain food prices as well as RABI sowing as well as global sugar prices that have remained elevated.  This is despite the recent big fall in global crude prices as the Central Bank takes into account the fact that crude oil prices are very volatile and with further output cuts it may rise again. 

Forward Guidance: 

Governor’s statement that inflation target of 4% is yet to be reached and that they have to stay the course indicates that the monetary policy will remain tight and we can expect no change in rates for now.  They are also not swayed by expectation in global markets about US and European rate cuts next year and they would like to observe how things evolve vis-à-vis expectations. In our view, any cut in rates can happen only in Q2 of FY 25.    

EXTERNAL SECTOR AND RUPEE:  

Governor’s comforting statements about external sector being manageable and rupee’s stability and low volatility compared to the peers is not surprising.  We do agree that rupee has stayed stable even as we have observed big swings in other global currencies which have reflected stronger domestic fundamentals rather than reacting to global volatility. 

Reserves at USD 604 as on December 1st is a good retracement, but no mention is made about the forward book of RBI (which we feel is reduced to a great extent now).  We will get the picture of the combined book spot and forward reserves from the next monthly bulletin of RBI. 

LIQUIDITY MANAGEMENT:  

The Governor said that the net position under the liquidity adjustment facility (LAF), which measures system liquidity, entered deficit mode for the first time in September 2023 following a nearly four-and-ahalf-year break since May 2019.  The overall tightening of liquidity conditions is attributed mainly to higher currency leakage during the festive season, government cash balances and Reserve Bank’s market operations. Keeping in mind that their stance of liquidity withdrawal was automatically achieved under the above conditions, RBI did not conduct any OMOs announced in earlier meeting.  This also means that RBI keen to maintain liquidity prudently and flexibly in balance and not to allow higher surplus or deficit.   

CREDIT CONTROL:  

The Governor reiterated its pro-active approach in managing risks in banking sector due to lending, referring to their action in November of increasing risk weights on unsecured consumer credit exposures of banks and NBFCs (including credit card receivables) as well as bank lending to NBFCs, other than housing finance companies (HFCs). The regulated entities had also been advised to put in place Board approved limits for various sub-segments under consumer credit, specifically unsecured consumer credit. 

REVIEW OF THE REGULATORY FRAMEWORK FOR HEDGING OF FOREIGN EXCHANGE RISKS – Governor’s speech made an important announcement on markets as under. 

The regulatory framework for foreign exchange derivative transactions was last reviewed in 2020. Based on market developments and feedback received from market participants, the extant regulatory framework for forex derivative transactions has been refined and consolidated under a single master direction. This will further deepen the forex derivatives market by enhancing operational efficiency and ease of access for users. 

We expect more relaxations for large corporates to hedge themselves in the market.  We shall revert to you as and when the directions are issued.   

OUR VIEWS:  

The forex implication of the policy is almost NIL except that it can be seen as continued vigilant approach of the Central Bank keeping both growth and inflation in mind, which is laudable.  

As for the policy rate is concerned, as growth remains robust and inflation uncertainty abounds, it is very unlikely that the RBI will go for a policy rate cut before 2nd quarter of FY25, even if other major central banks do cut in line with current market discounting.  However, the Indian bonds will continue to attract flows due to (1) its high nominal yield; (2) expectation of large funds allocated on account of inclusion of Indian Bonds in Global Bond Index.  

Powell really had his Volcker moment last year at Jacksonhole, but it was quite a damp affair this year.  Powell’s words lacked the drama associated with previous speeches.  

In remarks delivered at the central bank conference in Jackson Hole, Wyoming, Powell said inflation was still too high even with recent favourable readings, and that the U.S. central bank has substantial ground to cover to regain price stability.  So they are clearly keeping door open for more rate hikes.

But at the same time, Powell noted that economic uncertainty called for “agile” monetary policy making, and that the Fed will proceed “carefully” when deciding its next policy move.

There was little bit for every one be it bull or a bear as Powell gave quite a blaanced remark.  

But other FED members had differing views on  the course the CB should take, but again depending on upcoming inflation reports.  

ECB

ECB policymakers are increasingly concerned about deteriorating growth prospects and momentum for a pause in its rate hikes is building,  But Lagarde did not deviate from her known cautious remarks and there was no hint of dovishness, hence EURO yields and the EURUSD recovered their losses.  

BANK OF JAPAN

But message from BOJ Governor Ueda was decidedly dovish as he said Underlying inflation in Japan remains “a bit below” the Bank of Japan’s 2 per cent target, and as a result the bank will maintain the current approach to monetary policy.  He even expected inflation to decline from the current levels.  

BANK OF ENGLAND

Interest rates in Britain might have to stay high “for some time yet,” Bank of England Deputy Governor Ben Broadbent said on Saturday, as the central bank seeks to curb the highest inflation rate among the world’s big rich economies.  Broadbent said in a speech that the knock-on effects of the surge in prices – such as pressure on employers to push up wages, which has led to record growth in pay – were unlikely to fade away as rapidly as they emerged.

As can be seen most Central Bankers were non-committal about policy move going forward and decidedly data-dependent.  

CURRENCY IMPLICATION – no clear influence for the Dollar from the above statements.  If anything, one could say Japanese Yen would weaken more, which did happen as it touched a147.45 yesterday from 145.75 seen on Friday.  

It looks like even the market wants to see more data to confirm US economy’s relative resilience and how the yields react.  Looking at some of the forward looking indicators like M2 declining, consumer confidence dropping, job openings falling and increasing credit card access by consumers, one could say that slowdown in the largest economy may just be starting.    If it does, it boils down to whether it is a severe slowdown or still holds better than others. 

Eventually, Bond market will give us the direction for the Dollar which looks slightly on the bullish side (yields to drop). 

UNION BUDGET 22-23

Unlike what is usually associated in the Indian Budget, the one announced this year contained nothing dramatic or path breaking and had little that concerned the common man directly.  But at the same time, it was growth and investment oriented with a reformist approach.  It did disappoint many vis-à-vis their expectations, but best thing was that the Government avoided including any populist measures, notwithstanding that we have many State elections coming up.  

FISCAL MATH – The deficit for FY 22 is exceeded by 0.1% and pegged at 6.9% of GDP vs. estimate of 6.8%, despite robust revenue collections.  This overshoot is due to higher expenditure.   But this may still come down due to increased tax collections.  But estimate for FY 23 is kept at 6.4% of GDP which looks achievable due to higher tax collections that will accrue due to higher nominal GDP which is projected at 11%.  This is despite higher budget allocation at the Central level by additional 3.5 trillion.    But importantly, budget also allows States to run a deficit of 4% vs. 3% mandated by the Finance Commission, besides allocating 1 lakh crores as 50 year interest free loan over and above the normal borrowings.  Allowing State to spend more is very positive as they contribute two-thirds of the capex.  The budgeted deficit may be easily met as the revenue estimates look quite conservative considering the projected growth.  

HIGHER GOVERNMENT BORROWINGS – The borrowing numbers at Rs. 14.95 lakh crores are higher than even the highest estimate among market participants. It’s not been offset with any announcement regarding overseas trading of Indian bonds or bond index inclusion.  69% of the fiscal deficit is expected to be funded with market borrowing, which is higher than recent years.  Reliance on small savings borrowing is pegged at Rs. 4.25 lakh crores vs. Rs. 5.91 lakh crores in FY 22.  The borrowing program will be very challenging for market in a year when RBI is expected to raise rates and curtail excess liquidity.  It is not, therefore, surprising that the bond markets sold off with yield on 10 year rising more than 20 basis points from the low of the day.  

Part of the borrowing is envisaged through issuance of Green Bonds as borrowing for green infrastructure.  It is not clear how these Bonds will be made more attractive to invest in.  

GDP AND REVENUE PROJECTIONS: Nominal GDP for FY 23 has been projected at 11.1%.  Economic survey had indicated growth of 8.00 to 8.5%. Assuming inflation at even 4-5%, the nominal GDP growth should have been above 12%.    Accordingly, even the revenue projections have a touch of conservatism.   Thus, we feel the deficit target of 6.4% for FY23 will be easily met, unless we have a big overshoot in expenditure.  

HIGHER CAPEX – Budget’s clear emphasis on expanding capital expenditure is a welcome directional change particularly since a larger portion of 45.2% of fiscal deficit is being devoted to capital expenditure (Rs. 7.5 lakh crores), with higher allocations for roads and railways, but lower for financial services.  At a two decade high it spells a welcome structural change in government expenditure in favour of capital expenditures.  Further, the central government’s efforts to nudge states through incentives has aided in contributing to the recovery in capex spending by states.  This is clearly pro-growth and pro employment.  The approach seems to be to support and incentivise supply-side capacity creation for sustainable growth over a longer period of time.  

Revenue expenditure has been contained with lower subsidies for fertiliser and food as well as for the MGNREGA scheme. 

DISINVESTMENT: Disinvestment targets have been revised down (perhaps getting more realistic).  Budget estimates Rs. 780 billion for FY 22 against earlier estimate of 1.75 trillion, while for the next year it is estimated at 650 billion rupees.   Though the Finance Minister stated that the LIC IPO will happen soon, one can conclude that the size of the proceeds from the same is going to be much less, though the valuation of LIC is yet to reach the final conclusion.  It leads us to think that this IPO will be split between two fiscal years.  Smaller IPO this FY means that related FX flows will be lower which will be easily absorbed by RBI without any major appreciation pressure.  

OTHER MEASURES TO BOOST GROWTH AND INVESTMENTS: Concessional tax rate of 15% for domestic manufacturing companies commencing manufacturing or production by 31 March 2023 extended to 31 March 2024.  Profit-linked tax exemption for eligible start-ups extended by another year.  Start-ups incorporated up to 31 March 2023 will now be eligible.   Several changes to duty rates aligned to “Make-in-India” and “Atmanirbhar Bharat” policy have been made.  Proposal to phase out concessional rates in capital goods and project imports gradually; moderate tariff of 7.5% made applicable

Focus on promoting digital economy & fintech, technology enabled development, energy transition, and climate action.  SEZ Act to be replaced by new legislation to enable states to become partners in ‘Development of Enterprise and Service Hubs’.

TAXES: There have only been minor changes in the taxes, like capping surcharge on LTCG at 15%, tax relief for differently enabled persons, establishment of faceless customs, removal of some of the age-old duties and exemptions, simplification of custom rate and tariff structure particularly for sectors like textiles, chemicals and metals.  Further, more rationalizations have been introduced to encourage domestic production. For the gems and jewelry sector which has contributed to a big surge in exports,   customs duty has been cut on cut and polished diamond and gemstones, besides implementing a simplified regulatory framework to facility export of jewellery through e-commerce.    

Income from virtual digital assets (including crypto currencies) will be taxed at 30% with only cost of acquisition being allowed a deduction. Gifts of virtual digital assets will be a benefit taxable in the hands of the recipient.  TDS at 1% introduced for virtual digital assets transactions.  

IMPLICATIONS FOR MARKETS: Higher borrowings and uncertainty about timing of including India bonds in the Global Bond Index are negative for the money market and yields will see upward pressure.  However, as foreigners’ holding of Indian Bonds is far less now, we may not see a big forex outflow due to the same.  On the other hand, further higher yields above 7% will bring in flows from them once RBI normalizes the policy.  

India’s monetary policy is likely to tighten in the coming months as RBI responds to sustained higher inflation and global tightening trend.  However, in its place the higher fiscal from the Government is expected to support the economy.

 Budget has assumed crude oil prices at 70-75 per barrel, which looks very optimistic.  As per current trends, oil is likely to be pegged at much higher level and that has negative implications for the trade and Current Account with attendant pressure on Rupee.  

Emphasis on growth in the budget will boost the corporate sector and possibly re-rate the earnings growth.  This is likely to bring back the FII investments in selected sectors.  Besides, long term growth prospects being cemented, will continue to attract direct investment in Indian corporate.   Disinvestment targets have been moderated, but there is likelihood of an outperformance.  However, globally tightening financial conditions will adversely affect the carry flows.  Thus USDINR is likely to move in range between 73.50 and 76.50 with Central Bank’s presence at extremes preventing undue volatility. 

The South African Rand kept up to its reputation as a high beta currency in the last quarter of 2022, with USDZAR moving almost 10% from high to low, while the comparable index of EM currencies moved only 6%.  This was the quarter when Dollar went through a sizeable correction to its 16 month rally, the trigger coming from the steady moderation in US inflation and the rate hike prospects being sized down by the market, though FED officials remained hawkish.  Investors took profit on their Dollar long positions and bought back bonds which had fallen substantially.  Even Global stock Index recovered as much as 18% despite recession fears in the background and here too the South African benchmark index outdid by rising by more than 23% from the lows.  

MACRO DEVELOPMENTS

TRADE SURPLUS of South Africa is estimated to fall far short of the robust one posted in 2021. Trade surplus for the 11 months to the end of November was R187.8-billion, less than half of the R402-billion recorded over the same period in 2021.   But the sizeable fall in oil price is already helping to arrest this trend.  In fact, Current Account Deficit as a percentage of GDP has slightly improved from -1.3% to -0.3% as a direct result of trade balance improving in November.   The balance of payment was affected by more capital flowing out than what came in.  

COMMODITY INFLUENCE: The oil price is losing its lustre in the face of a slowing global economy, and that may contain the price of major South African commodities such as platinum group metals and iron ore.  On the other hand, Gold may benefit from the fog of global economic uncertainty or emerging geopolitical flashpoints, but its importance to the South African economy and its export profile is a fraction of what it once was.  Should the global economy enter a deep recession in 2023 as expected by many analysts, the external performance and thus the Rand will be negatively affected.  

Non-economic factors have also worked to affect South Africa’s performance on the external front. 

LOGISTICS ISSUES: Transnet which is a fully owned South African Government organization operating as a corporate entity aimed at both supporting and contributing to the country’s freight logistics network continued to pose problems in achieving export performance with several strikes, inefficiency and corruption.  It is estimated that there was an export loss of SAR 50 billion on an annualised basis last year for iron ore, coal, chrome, ferrochrome and manganese exporters, as measured by delivered tonnages against contracted rail tonnages. This compares to a loss of R35 billion in 2021 based on the same metric. Attempts to reform the system have failed repeatedly.

POLITICAL BOTLENECKS: The current President Mr. Cyril Ramaphosa, who had succeeded Mr. Zuma who was forced to resign amid numerous charges of corruption, however faced his own scandal.  An independent report commissioned by the speaker of parliament said Mr Ramaphosa may have broken the law but he has denied any wrongdoing.  After facing impeachment proceedings, he managed to survive a vote in Parliament.  However, there are divisions within the party and his political future and hence the stability of politics in the country is under question.  Preoccupations with political survival have affected economic performance.  

DOMESTIC MACROS

On most parameters they performed better.  GDP for Q3 2023 improved to 1.6% from -0.7% and bettered expectations also.  Consumer Confidence rose from -20 to -8.  As already mentioned earlier CPI inflation also came down.  Manufacturing PMI rose to 50.6 from 49.5.  

INFLATION AND RATES: In line with the global trend, recent inflation in South Africa also declined slightly and the Central Bank is likely to keep the monetary policy unchanged for now.  From November 2021 to November 2022, they had raised its key repo rate by 350 basis points, bringing the prime lending rate to 10.5%.  However, major global Central Banks are still on rate hike path as their inflation rate remains far higher than the target, hence the funds flow might get affected.  

RECENT RAND MOVES AND OUTLOOK

Temporary resolution of political crisis, relative better performance on trade led by lower oil prices and also the fall in broader Dollar Index have helped Rand to perform better in the last two months.  However, the structural problems haunting the economy remain and will keep it from gaining much.  In fact, the latest fall in the Dollar Index has not seen Rand extend its gain much beyond 17.00 and has in fact weakened last week even as many EM currencies performed better.  

Prospects of recession in major countries are likely to affect its exports and will keep the currency subdued.  

TECHNICALLY, we continue to believe that the range of 16.50 to 18.00 will hold Rand moves at least in the first half of this year.  Only a further large slippage in the broader Dollar can see more gains for the South African currency, but even then we do not expect 15.50 to break without a vast fundamental shift in its external performance.  

SUPPORT LEVELS 16.60 AND 16.20

RESISTANCE LEVELS 17.30 AND 17.75