Known Unknowns

What we know

 

It’s a short note today, as there really has been little to write about this week. Notwithstanding brief spikes during SONA and the Budget, the second half of February saw the ZAR.USD in a stable 13.80-14.20 range, as global markets stabilised and little new news-flow emerged.

From a local perspective:
– Neither SONA nor the budget contained any major surprises;
– The economy continues to struggle;
– Fears around Eskom remain;
– The State Capture enquiry trundles on, painting an ever-grimmer picture;
– All eyes are fixed on the Moody’s announcement in the coming weeks.

Globally:
– The outcome of the USA-China dispute remains unclear and any comments tend to push the USD one way or the other, as well as impact on emerging markets;
– Brexit, Brexit, Brexit…
– US data has generally been pretty strong post the Fed’s recent dovish tone, putting something of a damper on the carry trade;
– Geo-political issues come and go, this week being the USA-North Korean summit and the India-Pakistan tensions.

The bottom line is that everyone for the time being is aware of the same “known unknowns”, there is no Emerging Market or South Africa-specific panic and, as a result, ZAR volatility has declined.

Despite the relative bullishness of our November ’18 through April ’19 base case of 13.10-13.85, it is worth noting the below comment from the Investec’s Tuesday Morning report:

“When pulling back the lens on ZAR, a case can be made for the tide gradually turning against the ZAR through the course of the year. The window of opportunity for the ZAR to stage a strong bout of appreciation is closing and as the global business cycle matures and risk appetite dwindles, so emerging markets more generally will struggle to attract the kind of offshore flows they have in recent years. That being said, it is not a singular event. It will be a slow gradual process that will unfold over time. Through that phase, bouts of ZAR appreciation are still possible and the potential for the ZAR to gain more ground should not be dismissed out of hand.”

 

What others say

 

25 February 2019

Reuters – British PM Says Deal Within Grasp, Brexit Delay Won’t Solve Crisis

“May is struggling to get the kind of changes from the EU she says she needs to get her divorce deal through a divided parliament and smooth the country’s biggest policy shift in more than 40 years.”

“In currency markets, sterling jumped to $1.3149, a near four-week high, in early Asian trade after Bloomberg reported May was expected to allow her cabinet to discuss extending the Brexit deadline beyond March 29 at a crunch meeting later in the day.”

Business Day – Economic Week Ahead: Few Bright Spots To Lift The Economy

“Economists are braced for a slew of uninspiring economic data as global growth continues to slow and SA’s domestic recovery struggles to find momentum.”

26 February 2019

RMB Global Market Research – Don’t Be Fooled; It’s Not All Smooth Sailing

“Despite overriding concerns over Moody’s impending sovereign-rating decision… investors are pricing the risk of a downgrade more reasonably as they become familiar with the details of the budget and its implications for contingent liabilities.

But sentiment is fickle and expectations could easily shift if Moody’s expresses a more cynical tone as Eskom slowly reveals details of its operational and financial turnaround plan.

Expect USD/ZAR to maintain a consistent trading range, supported by buoyant global risk appetite.”

Reuters – Asian Shares Slip From 5-Month Highs, Pound Jump On Brexit Delay Hopes

“US and Chinese negotiators work to hammer out a deal that would end a protracted tit-for-tat tariff battle… notable that 1) no new deadline date has been set and 2) there weren’t any formal statements published from either side following the talks in Washington.”

27 February 2019

MoneyWeb – Wiese To Lose Control Of Shoprite

“After some 50 years of shaping, moulding and influencing the strategic direction of retail giant Shoprite, Christo Wiese is to sell his voting rights, held as deferred shares, back to the company… deferred shares, which carry 32.3% of the voting rights.”

Fin24 – MultiChoice Lists On JSE “A Proud Moment”, Says Naspers 

“This is an opportunity for MultiChoice to unlock a wealth of potential and capital for its investors on one of the most trusted, stable and robust exchanges globally.”

28 February 2019

Reuters – South Africa’s Rand Falls On Subdued Risk Appetite

“The South African Rand fell on Thursday as fading hopes for a US-China trade deal and an unsatisfactory end to the US-North Korea summit subdued demand for emerging market currencies.”

What we think

 

Last week we wrote that “…we have spoken about the resilience of the ZAR over the past few months and believe that this remains so, notwithstanding the 5.5% sell-off in February – remember, last month was the best January in the Rand’s history, gaining 7.9% (a bit too much too soon in our opinion, despite our relative bullishness) and year-to-date, we are up 3.1%, better than most emerging markets other than Russia and Brazil. Towards the end of last year, our base case through to the end of April was for the Rand to trade between 13.10 – 13.85. The main risk to this would of course be a negative Moody’s review on 29 March leading to significant sell-off.”

Given what was written in the first section, it should be no surprise that the above view remains unchanged. The weakness over the past 48 hours (from 13.82 to 14.13 at the time of writing) has caught us somewhat by surprise, albeit that USD strength in response to strong US economic data has been the apparent cause. We will keep a watchful eye on 14.20, as a move higher than this opens up the possibility of continued weakness to 14.40 – 14.50.

We do, however, expect 14.20 to hold. Our range for the week ahead is thus 13.80 – 14.20.

 

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Have a great weekend!