March 08, 2021
Market News 8 March 2021
What we know
It has been quite difficult recently to be able to sit back and enjoy any Rand strength before being overshadowed by a menacing dark cloud of bad news for EM assets. Given the circumstances, our budget speech was a positive affair and Tito Mboweni struck a number of vital chords. However, right on cue, the USD rebounded almost immediately and has continued its rally since.
After a tumultuous week in the US bond market, participants were looking for reassurance from Fed chair, Jerome Powell. However, Powell was indifferent to the recent moves and did not mention anything to contradict the Fed’s currently loose stance on spending. Markets continue to chase the Fed for assistance at the first sign of trouble, but Powell’s dismissive stance was a shock; a stark reminder that the Fed is not there to prop the market up on demand.
It seems that the US’s strong economic performance has got the market thinking inflation may not be as far-fetched an idea as initially thought coming into 2021. Although the Fed’s forecasts for 2021 have yet to introduce any interest rate hikes, the EuroDollar curve has now priced in a hike for December 2021. The return of inflation would most likely see EM currencies falter as the carry trade dries up and investors start to look closer to home for their returns.
The Rand took one last knock before the weekend in anticipation of the US’s $1.9 trillion stimulus package, which was subsequently passed by a narrow margin in the Senate. There had been expectations that there would be more concessions and a cut of $200B to the bill before finding its way to the House. Any reductions to the bill by the House will likely be viewed as USD negative and may see the Rand trade slightly stronger thereafter.
We had previously mentioned our concern regarding the real return on SA bonds for foreign investors and what it would mean for the Rand should we see a correction. As laid out above it’s not been a pretty ride – although we cannot attribute the entire move to the variation in bond yields, in little over 1 week we have surrendered just short of R1 to the USD. Quite remarkable.
What others say
Financial Times – Are markets really rigged?
“Should a “fair” market mean that ordinary, individual investors have the same chances to succeed as amply-resourced investment companies stuffed with professionals that have dedicated their entire lives to trading and investing? That would be like saying a pub football team should be able to compete with a Premier League side.”
Business Times – Economists on the rand, Covid immunity – and why South Africa’s next ratings downgrade is going to hurt
“Rating agencies and global investors were not overly impressed with South Africa’s national budget, casting doubts over the government’s ability to stick to its expenditure targets, say Nedbank economists.”
IB Times – China exports spike to highest in decades after Covid-19 hit
“Electronics and textile exports such as masks contributed to the spike in outbound shipments, as demand for work-from-home supplies and protective gear against the virus outbreak soared during the pandemic.”
Zero Hedge – Why Africa hasn’t kickstarted its renewable energy boom
“Africa has a solar energy potential of as much as 1,000 GW and wind potential of 110 GW, not to mention 350 GW in hydropower potential and 15 GW of geothermal potential. And yet, all this huge potential remains largely untapped”
What we think
Last week we wrote that “…With the event risk around the budget now behind us, we are of the view that it will take a major event or extremely positive announcements for the Rand to erase the losses incurred at the end of last week”.
For the past few months, we’ve frequently been mentioning to clients that it’s not really been about the Rand. In other words, rather than South Africa specific factors being behind the ZAR’s moves, it has been global sentiment and the resulting risk appetite – particularly in response to factors such as USD bond yields’ reaction to stimulus, the state of the global economy, and developments related to the pandemic.
Now, with a real absence of news locally, that will continue to be the case. The budget has come and gone, we are through the brutal second covid wave and politically, things are quiet. It’s also fairly hard to see the markets caring too much about what the ratings agencies have to say, if anything, in the coming weeks and months.
With this in mind, our outlook for the Rand hinges on how the USD fares in the near-term. The USD index (a trade-weighted basket of the USD against its major trading partners’ currencies) has had a number of false-starts of late in trying to recover off its recent lows. The difficult question of course is whether the current rally, which is underway will also fail or continue, given the increased likely of US rates staying higher and potential rising further. The index (DXY) traded above 92.00 last week for the first time since the end of November and this may very well be the start of a new 92.00 -94.00 trading range. All things being equal (an over-simplification of course) this would translate into a USD.ZAR range 15.45 – 15.78.
We have maintained a neutral range of 15.00 – 15.50 for the past few months, and this remains the case. The implication is that we are now close, for the first time in many months, in seeing a Rand trade a bit weaker than what we feel it should. Unfortunately, if the USD continues to recover, then sustained trading above 15.50 is certainly likely.
Our range for the week ahead is 15.30 – 15.65.
Have a great week!