Rand Keeps Fighting Back

What we know

 

Following last week’s post-MTBPS blues, the week started with a somewhat cautious tone, as the market waited to see which direction the ZAR may follow once the dust had settled. This was compounded by uncertainty as to whether (and when) Moody’s would adjust their outlook on SA. Adding to the nervousness was the better than expected US GDP release on Friday which increased the likelihood of further USD strength.

Although the Rand looked to start the week on the front foot, there were two events that threatened to push it weaker: first, we once again saw trade war tensions rise, with the final Chinese goods yet to have tariffs applied to them coming under Donald Trump’s radar, while on Wednesday a surprising balance of trade deficit added to the pressure which saw the ZAR touch its weakest level in over three weeks at 14.85.

Away from the above it was a pretty quiet news week, with data release being the main focus:

1. SA unemployment on Tuesday was worse than expected at 27.5%, again highlighting the massive challenge of creating jobs in a pitiful growth environment;
2. EU GDP declined to 1.7% year-on-year, lower than expectations;
3. The UK left rates unchanged as expected; and
4. The US ADP Employment Change figure came in stronger than anticipated, which in turn was followed by a much better than expected Non-Farm Payroll number.

By the end of the week, despite the absence of major fireworks, the price action had been surprisingly volatile and, ultimately encouraging. From the weakest level on Wednesday, the ZAR had gained almost 4% to trade at 14.29 at the time of writing, as we saw risk appetite creep back into the market, with Emerging Market currencies rallying.

What others say

 

29 October 2018

Daily Maverick – ‘Emperor’ Cyril’s Investment Jamboree Signals A Presidency Taking Shape

“The day was more remarkable when you consider the realities. South Africa is a beautiful but low-growth, high-unemployment, high-regulation country with among the most tjatjarag trade unions in the world. But South Africa also works in ways for which us locals don’t give ourselves enough credit. Investors reeled off the reasons for their investments: Economic infrastructure is good; it’s an easy road into the rest of Africa and the financial system is state-of-the-art (for corporates, if not consumers).”

Fin24 – Rand Firms 1% Against The Dollar As Emerging Markets Make A Comeback

“The rand firmed by 1% against the dollar on Monday at lunchtime, as a number of emerging market currencies strengthened against the greenback. On Friday the rand had weakened against the dollar after global ratings agency Moody’s said the mini budget presented by Finance Minister Tito Mboweni earlier in the week was credit negative. Moody’s is the only major global ratings agency to still have SA’s sovereign debt at above investment grade.”

30 October 2018

Reuters – South Africa’s Unemployment Rate Rises To 27.5% in Q3

“South Africa’s unemployment rate rose to 27.5% in the third quarter from 27.2% in the second quarter, the country’s statistics office said on Tuesday. There were 6.2 million people without jobs in the three months to the end of September, compared with 6.1 million people in the prior quarter, Statistics South Africa said its quarterly labour force survey.”

31 October 2018

Business Day – Rand Weaker As Higher Interest Rates Loom

“The rand weakened 1.4% against the dollar on Wednesday afternoon in a stronger dollar environment, despite the JSE surging 3%. Volumes on the JSE were on the low side, just exceeding R10bn a few hours before the close, indicating that offshore investors have not entered the market on a large scale.”

Business Report – Trade Deficit Sends Rand Into Tailspin

“Corporate treasury manager at Peregrine Treasury Solutions, Bianca Botes, said the weak labour figures, indicating that 27.5% of the South African workforce was unemployed, did little to move the rand as all eyes remained squarely focused on the US-China trade war dynamic. The rand later took a knock from news of the country’s trade balance deficit being at R3 billion in September – from an R8.77bn surplus in August – compared with market expectations of a surplus of R3.9bn.”

Reuters – Dollar At New 16-Month High As US Data Supports

“The dollar index .DXY, a gauge of its value versus six major peers, rose 0.08% to 97.09, its highest since June 2017. Less-than-stellar economic news from the euro zone region has weighed on the euro. The dollar, meanwhile, has enjoyed a boost from robust economic reports, including data last week which showed the US economy slowed less than expected in the third quarter.”

01 November 2018

Reuters – South Africa’s Rand Firmer As Dollar Longs Hesitate

“South Africa’s rand traded firmer early on Thursday, stepping back from a three-week low as investors pared some of their long dollar positions ahead of much-watched US jobs data. The greenback is seen dipping briefly after the non farm payrolls due on Friday, with a swell in short positions suggesting a post-data squeeze. A Reuters poll this week found the rand is likely to gain only 2% in a year and settle at 14.50/$, far from the near three-year best of 11.51 it hit in March.”

What we think

 

Last week we wrote that “…while not ideal, we do not believe that the ZAR price action this week has been completely discouraging, as we have seen attempts to rally in the face of bouts of weakness.  Volatility has of course spiked and the outlook does feel hard to call at the moment.  As things stand, given the global outlook, and in the absence of any Moody’s shocks, our immediate range for next week is 14.45 – 14.75, the caveat being that a break above 14.75 would bring 15.00 into play.”

While it was a bit concerning to see the ZAR trade through our resistance level of 14.75 for a brief spell, the ZAR has once again proven resilient this week and indeed, our support at 14.45 – while holding firm on a few occasions – was fairly convincingly broken today.  It’s been a fairly common theme in our weekly comments of late and we once again put forward our view, that the ZAR appears poised for further gains.

Our range the week ahead is 14.10 – 14.45 and we are starting to feel that, if challenged again soon, the 14.10 level may finally give.  This in turn could very well lead to a first serious test of moving through 14.00 and into the high 13.00’s.

 

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Have a great weekend!