01 June 2018

What we know

 

We mentioned in our last note that volatility has certainly made itself known in the local currency market again and this was the case again this week.  The only respite we had was on Monday and that was only due to the USD holiday!

The main driver of currency moves this week was the situation in Italy, which finally settled down late on Thursday, as President Mattarella agreed to the new proposed list of ministers that will serve under the incoming populist government.  While this removed the threat of snap elections, the longer-term implications for Italy’s position within the EU remains to be seen.  The uncertainty of the past few days was predictably negative for the ZAR and its emerging market peers.

The EUR itself was under continued pressure, extending its losses to new 10-months and almost touching 1.15 against the USD until recovering somewhat following the easing of the Italian concerns.

News was fairly thin locally, with the most significant event being the release of April’s PPI and Balance of Trade data.  Both of these figures were disappointing, with inflation being higher than expected and the Balance of Trade surplus being far smaller, neither of which bodes well for local economic developments.

The ZAR did lose ground over the week – down between 1.4%-1.8% against the three majors – however the volatility was interesting to observe.  Against the USD the range was 12.42 -12.73, but whenever we tested either end of this range, the bounces were fast and sharp.  There are clearly some big participants waiting at these level, so a break-out either way could see a big move sooner or later.

 

What others say

 

28 May 2018

Business Live – What S&P wants from SA before a return to investment-grade rating

“S&P, which in November cut SA’s foreign-currency rating to two notches below investment grade, on Friday affirmed its stable outlook on the rating and gave the new Ramaphosa administration credit for pursuing economic and social reforms… S&P director Ravi Bhatia said SA’s per capita growth rate was still very low and had been negative for several years,and SA’s public-debt trajectory was still going up on a net basis.”

“One would need to see higher growth on a per capita basis and that in turn will help the fiscal framework.”

29 May 2018

Bloomberg – Why Some Emerging Markets Are Suddenly Melting Down

“Investors had been enamored with emerging markets for more than two years. These days, they’re not so besotted. For several weeks, money has poured out of developing nations and into the U.S., causing the dollar to rise in value and the currencies of emerging markets to hit new lows… For some economists, it raises the specter of the late 1990s-era Asian economic crisis. What’s going on?”

30 May 2018

Reuters – U.S.first-quarter growth trimmed on weak consumer spending

“Gross domestic product increased at a 2.2 percent annual rate, the Commerce Department said on Wednesday in its second estimate of first-quarter GDP, instead of the previously reported 2.3 percent pace.”

“Growth is set to rev up soon given the deficit-financed tax cuts and a big increase in federal government spending,” said Scott Hoyt, a senior economist at Moody’s Analytics in West Chester, Pennsylvania.

31 May 2018

Moneyweb – Offshore investor interest in equities at risk as “Ramaphoria” wanes

“We still haven’t seen any real results of an improving economy. So (when) we see solid GDP numbers then we could see more international buyers stepping in,” Nedbank Private Wealth Portfolio Manager Grant Gilbert said. “Given the Italian crisis and the strengthening of the dollar, emerging markets will come under significant pressure and we are already seeing that this week,” he said.”

Business Live – Rand faces more pressure as political risk spikes in Europe

“On Wednesday, the JSE failed to capitalise on a global relief rally, despite the rand bouncing back from a sharp sell-off on Tuesday, when risk aversion swept through the market due to uncertainty in the eurozone.”

“Following strong growth in much of the first half of 2018, emerging markets have recently seen a mass reversal of capital flows. The investment sell-off is being largely attributed to geopolitics, said Schroders analyst Craig Botham”

What we think

 

Another week at the end of which not too much has actually changed. Outside of the added concerns about the Eurozone, as well as rumblings of further trade wars as a result of the US steel and aluminium tariffs on Europe, Canada and Mexico, the local and global macro outlook is the same.

We do however see support for the ZAR.USD developing around the 12.45 level, while at the same time we are becoming a bit more concerned as to how many times we can test 12.70 without decisively breaking higher.  As such we have moved our near-term ZAR.USD range to 12.45 – 12.88.  The final potential joker in the pack this week is the USD Non-Farm Payroll on Friday afternoon, which always has the potential to cause large market moves.

 

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Have a great weekend!