Market News 7 August 2020

What we know

Short and sweet ahead of the long weekend! It’s been an unpleasant 10 days or so for the Rand with one of “those” blow-outs that we see a few times every year. Just a reminder of the extent of the sell-off we’ve seen, since last Wednesday the moves have been:

USD.ZAR: 16.38 –> 17.52 (6.5% loss)
EUR.ZAR: 19.28 –> 20.70 (6.9% loss)
GBP.ZAR: 21.23 –> 22.92 (7.4% loss)

Even by the ZAR’s standards these are big moves in a short space of time, while intra-day volatility has also picked up significantly.

Not every effect has a clear cause

The price action we’ve seen this week with regards to the Rand and other emerging market currencies has, as it usually does, seen commentators looking to ascribe a reason for the move and news sites looking for a narrative which can explain it.

We don’t typically ascribe to this simple and neat cause-and-effect scenario, as the drivers of such price moves are numerous, varied and complex. Nevertheless, the major topics being discussed, most of which are NOT new developments that weren’t here a couple of weeks ago, are:

• USA / China relations and the associated trade tensions
• Continued pressure on the USD and heightened risk aversion
• The global coronavirus impact – in particular, the USA’s lack of a coherent strategy and signs of new outbreaks in many areas previously under control
• Brexit and the looming deadline for an agreement
• US elections and neither Trump nor Biden being perceived as particularly inspiring leaders
• The continued strain on the SA economy
• The virus continuing to take its total in terms of infections as well as economic impact
• A slew of new or ongoing stories of corruption and incompetence which we’d hoped had left the building with Zuma when he departed

A Rapid Rand Unwind

We noted last week that the break-out from the recent strengthening trend (orange lines) appeared to be confirmed. As such, we felt that a move to 17.20 – 17.30 was likely and it’s clear from the below that we have moved comfortably through that and into a range in which we would expect to see some consolidation.

We would have expected 17.30 to perhaps prove to be a level at which the recent sell-off could stall and while there was a bit of a tussle around this level, from early Thursday morning we saw a decisive next leg weaker, which has seen us reach 17.61 at the time of writing.

What others say

3 August 2020

Business Maverick – Counting the economic cost of the 2Q COVID-19 lockdown

“Europe isn’t feeling the same economic headwinds right now, primarily because the rate of infection flare-ups in the region appears more manageable than the US, and there is a view that the region may exit recession sooner than the US.”

4 August 2020

Zero Hedge – How the race for a COVID-19 vaccine could go horribly wrong for the market

“At the very beginning of Hatzius’s note, he points out that his ‘base case’ calls for a COVID-19 vaccine to be widely available throughout the US and Europe by the end of Q22021, or the end of Q32021, at the very latest. There are more than a hundred vaccine candidates in the making, but all the major candidates are targeting the same protein. This means that once a vaccine succeeds, there should be at least a modest surplus – though, to be sure, governments are striking deals for future vaccine supplies left and right.”

5 August 2020

MoneyWeb – IMF urges SA reforms over budget fixes to boost growth

“The payoff from growth is much more than the payoff from fiscal consolidation,” said Montfort Mlachila, the Washington-based lender’s senior resident representative in South Africa. “Fiscal consolidation is needed, but it is definitely not sufficient and too much fiscal consolidation undermines growth.”

6 August 2020

Business Tech – Liquor companies in talks with government over lifting of South Africa’s alcohol ban

“South African liquor producer Distell says that it would prefer a constructive engagement with the government on the ongoing alcohol ban, instead of taking the issue to court.”

7 August 2020

Bloomberg– Trump widens China tech attack, ordering bans on TikTok and WeChat

“The bans mark a significant escalation by Trump in his confrontation with Beijing as the U.S. seeks to curb China’s power in global technology. With the U.S. election less than 90 days away, Trump is making his challenge of China a central theme of his campaign, where he trails Democrat Joe Biden in the polls.”

 

What we think

 

Last week we wrote that “…we anticipate that this (16.90 – 17.30) range should now be the area in which we see some short-term consolidation…the USD could quite conceivably see a 2% one way or the other in the short-term. From the current level at the time of writing of 16.96 that would imply a move to either 16.61 or 17.31. Anyone who has been reading this note recently will know which figure we feel is more likely (or at least makes more sense to us)!”

Our conviction over the past 4-5 weeks that the Rand was too strong means that we don’t feel much of a need to give a “reason for current weakness” as so many people will ask. The headlines may point to the virus or the economy, or any particular issue on a given day. We don’t buy into this simplistic cause-and-effect scenario. Rather, we believe that the market’s assessment of the fundamental state of the world – and the risk associated with it – has been wrong and we are now seeing that unwind.

Nevertheless, after such a rapid move weaker, we now think that we are potentially into oversold territory and would think that further weakness should be capped around 17.80 in the short-term. The biggest caveat here for us remains the fact that the USD, too, may be oversold and due its own rally – that of course would not bode well for ZAR.USD.

Our conviction in terms of the short-term ZAR direction is now fairly low and we rather favour seeing how next week’s trading plays out, in order to see some kind of consolidation and a possible new trading range.

Our range for the week ahead is 17.30-17.80.

 

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Have a great long weekend!