In a fairly quiet week ahead on the economic data front analysts are likely to prioritise the release of the government’s gross and net reserves figures for June, which are expected to show a decline due to the revaluation effect from a stronger dollar and the consequent decline in the gold price.
The dollar index is trading at a more than three-month high as recent hawkish comments by US Federal Reserve chair Jerome Powell and robust economic data out of the world’s biggest economy prompt analysts to bring forward their expectations of a US rate hike. This is causing the dollar to appreciate, prompting investors to repatriate money from higher-yielding assets such as the rand and putting pressure on the price of precious metals.
These market dynamics have been reflected in the value of the rand, which has gone from as strong as R13.41/$ a month ago to as weak as R14.51 on Friday.
Investec said in a client note on July 2 that the Reserve Bank’s gross reserves position is forecast to have decreased to $53.3bn in June from $54.1bn in May based solely on the revaluation effects caused by a stronger dollar and weaker gold price. The gold price fell about 7% in June and at the time of publication was trading at $1,787/oz.
“Foreign exchange reserves are projected to have declined ... based on the revaluation adjustments linked to the appreciation of the US dollar,” said Investec economist Kamilla Kaplan. “However, the actual level of foreign exchange reserves will likely differ from the forecast owing to foreign exchange swaps that are used for liquidity management purposes.”
Even so Investec expects that SA’s foreign exchange holdings are likely to be boosted by about $4bn in coming months due to the IMF issuing a $650bn general allocation of special drawing rights to its member countries in a bid to supplement their reserves in the wake of Covid-19. The allocation would be made to IMF members in proportion to their IMF quota share, which Investec says amounts to about 0.64% for SA.
SA’s gross and net reserves data for June is scheduled to be published by the Reserve Bank on Wednesday.
Of less importance is the Standard Bank purchasing managers’ index (PMI) due on Monday, which is likely to give an indication of the health of the manufacturing sector. The more closely watched Absa PMI, which was released last week, showed the recovery in manufacturing slowed for a second consecutive month in June. Manufacturing accounts for about 13% of GDP.
With SA experiencing a devastating third wave of Covid-19 infections driven by the new Delta variant of the virus, it is likely that manufacturing sentiment will continue to wane as the country’s vaccine rollout lags far behind that of other nations. SA recorded a record 26,485 new Covid-19 cases on Saturday, with total deaths climbing to 61,507.
The majority of new cases SA is recording in its third spike in infections are occurring in Gauteng, suggesting the pandemic’s impact on the economy is likely to continue until vaccination rates can be substantially improved.
Investec estimates that just more than 3-million vaccines have been administered in SA out of a population of 59.62-million. By contrast, total global vaccinations have reached 3.16-billion, or about 40% of the world’s 7.9-billion people. Fifteen countries have also vaccinated more than half their populations, including the US and the UK.
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