February 04, 2019
What Was Behind The Recent Rand Surge?
What we know
After a reasonably quiet start to the year, things certainly kicked off this week!
While the Brexit woes continue to rumble on, Wednesday’s decision by the Federal Reserve to keep rates as unchanged really got the markets moving.
Although the decision went as expected, the accompanying statement was more dovish than anticipated and has seemingly taken any rate hikes off the table for the foreseeable future.
So, what does this really mean? Whereas investors and traders were previously seeing the possibility of higher yields on USD assets, they are now willing to look elsewhere in search of returns, with the result that the risk/reward equation for Emerging Market currencies became more appealing.
This is what is referred to as carry trade and has been the main driver of this week’s gains for the Rand and some of its peers. On the week the Brazilian Real has gained just under 4%, the Rand 2% and other developing currencies around 1%.
While we are clearly not alone in that bracket this week, the Rand remains the out performer year-to-date, having gained 8.5% in January to a high of 13,2199, whereas its peers have seen gains in the region of 2% – 6%.
This week’s strength came at an important time from a technical perspective for the Rand, as the 13.60 level had been providing some resistance to further gains. Once this level was broken on Wednesday evening, the stage was set for a retest of August’s highs of 13.30, the level at which the Rand had been trading prior to the Emerging Market sell-off.
What others say
28 January 2019
Fin24 – Goldman Cheers As Rand Heads For Best Ever Start To A Year
“The South African currency is heading for its biggest January gain against the dollar since Bloomberg started compiling the data in 1999. And with expected volatility near an eight-month low, traders are discounting local stumbling blocks in coming months, including a budget speech, ratings review and election.”
29 January 2019
MoneyWeb – China Weakness Spreads Far And Wide
“The world’s second-largest economy, which contributes about a third of global growth, has been weakening for years after averaging more than 10% growth for three decades through 2010. The pace of expansion cooled to 6.6% last year, the slowest since 1990, while retail sales grew 9%, the least since 2003.”
Reuters – Flying Sterling’s Wings May Be Clipped As Best-Price Brexit Is Priced In
“From option markets to positioning indicators, market pricing indicates that either a postponement of the Brexit deal or acceptance of Prime Minister Theresa May’s deal would be a short-term positive for the pound. But the uncertainty a delayed Brexit could cause would cap further potential gains. The pound is already on track for its biggest monthly rise against the dollar in a year as markets see a diminishing risk that Britain will leave the European Union on March 29 without an agreement on future relations in place.”
30 January 2019
MoneyWeb – Rand Inches Upwards As Offshore Turmoil Aids EM Currencies
“A dovish Fed, as well as political uncertainty and signs the world’s no. 1 economy is slowing, have spurred demand for emerging market assets this month and has seen the rand outperform its peers – bar the Russian rouble.”
Reuters – Trade Wars – We’re Next, European Investors Fear
“Analysts trying to decipher the US president’s strategy believe that a confrontation with the EU is a probable next step following the revamping of the North American Free Trade Agreement and his current efforts to slash the US trade deficit with China from a record 375 billion dollars in 2017.”
“We are next in the queue,” warns BNP Paribas’ chief economist William De Vijlder, adding that “the subject of the EU-US trade negotiations has been under the radar up to recently but could resurface soon.”
31 January 2019
Market Watch – Bitcoin Is About To Do Something It Has Never Done Before – Hint: It’s Not Good
“…if you ask Travis Kling, founder and chief investment officer of Ikigai Asset Management. He believes there’s more pain to come, arguing the industry needs a shake-up before the tide can truly turn. “More exchanges gone. More projects shuttering. More SEC enforcements. More ‘crypto is dead.’ Only then do we move higher,” he tweeted.”
RMB Global Markets Daily
“Score one for the Rand. Though weaker global growth is usually synonymous with weaker EM currencies, in the current context, a scenario which entails slowing rates of US growth and inflation such that the Fed does not hike would see the dollar weaken, to the benefit of EM currencies. But, as we continue to caution, two-way risks are abound, especially if we throw domestic factors into the mix. The rand has also run very far, very fast so we wouldn’t be surprised by a slight retracement to USD/ZAR13.50 today.”
01 February 2019
Daily Fx – Asian Stocks Mixed On Trade Hopes, Weak China Data
“Hopes for a trade settlement between China and the United States gave some Asia Pacific equity markets a degree of support Friday, despite some terrible manufacturing numbers out of China which underlined once again how important a deal now is. Investors also looked toward key US employment date due for release later in the session. January’s nonfarm payrolls data are coming up after Asian bourses close with market expectations centered around a rise of 165,000 jobs and an unchanged unemployment rate of 3.9%.”
Fin24 – How Deep Does The Rabbit Hole Of SA Corruption Go?
“…Recent evidence splashed across newspaper front-pages and televised hearings about bribes and sweetheart deals between businessmen and ruling African National Congress officials suggest the rot runs far deeper than most people thought. The scandals, which have embroiled international companies, threaten to deter investment in a country already battling perceptions of a skills shortage, comparatively high costs and violent crime.”
What we think
Regular readers will know that we have been fairly bullish on the ZAR outlook in recent months. Although we do remain concerned about the local risks that lie in wait over the next few months, from a trading and technical perspective the Rand has felt resilient in the face of any selling pressure.
For us, the 13.50 – 13.60 range was where we expected support before being able to move lower and, as mentioned in the first section of this commentary, that was comprehensively broken on Wednesday.
We now see 13.20 as the next level to watch, which, if broken would likely see consolidation in the 13.00 – 13.20 range. At this point it is important to mention the USD itself and for this we revisit our closing paragraph from 18 January:
“On the other hand, the USD itself is potentially looking somewhat vulnerable at the moment – although there could be significant support preventing the USD index dropping below the 94 level,should that be broken, it may be that last year’s lows of 90 are targeted. Should that happen then it opens the possibility of low 13.00’s for the ZAR.USD being reached.”
Even though the USD has weakened somewhat this week (currently 95.50 against a basket of its trading peers) we are already in the low 13.00’s. While we don’t believe it necessarily happen in the near-term, should the USD sell-off significantly, the current Head and Shoulders pattern on the chart (please call us for more detail should you require!) suggests that we could ultimately target 12.35.
In the near-term, however, we would expect the 13.00 – 13.20 range to be the most likely best case and reiterate that at current levels, given the known risk events (not to mention the unknowns), externalising at least portion of one’s funds would be prudent, when considered from a risk-management point of view.
In light of the above our range for the week ahead is 13.10 – 13.50.
Have a great weekend!