April 09, 2020

Currency News

Market News 9 April 2020

Market News 9 April 2020

What we know


With global news regarding the spread of the pandemic being somewhat more positive this week – and we use that term very relatively – markets have seen a slight reduction in volatility while major equity markets have rebounded. The S&P 500 has gained 11.5%, the FTSE 100 +5.2%, the Eurostoxx 50 +7.6% and the JSE All-Share +6.5%.

All of this has allowed some risk appetite to return to financial markets, and emerging currencies have rallied accordingly. Leading the way has been our Rand which is up 5.8% compared to the next best performers, Mexico and Brazil, which gained 5.0% and 4.4% respectively. Indeed, from our worst levels of 19.35 vs the USD which was reached early on Monday morning, we have rallied 7.5% as at the time of writing, to 18.00.

Aside from the news of Boris Johnson being admitted to intensive care, many of the headlines were slightly more optimistic than the past few weeks: we saw suggestions that Spain may be reaching their peak infection rate (something which they have just confirmed), daily deaths in Italy declined, the US projected that forecast fatalities may be lower than expected, as well as other encouraging signs from around the world.

Looking at South Africa and why the ZAR has outperformed, we would cite two possible reasons:

1) We had been underperforming our peers over the past couple of weeks. As we often note, due to the Rand being such a well traded and therefore liquid emerging market currency, it is often used as a proxy when traders want to either increase or decrease their emerging market exposure quickly. This in turn can lead to exaggerated out/under performance at certain times, especially as the market was still digesting our downgrade to junk.

2) Our own headlines regarding the virus in South Africa have been muted, with reported cases of infections and fatalities certainly appearing to be low at present. It is unclear whether this is due to our cases genuinely being low or whether there is simply too much uncertainty at this stage regarding what the actual numbers are. The main argument in favour of the former would be the positive impact of the early and decisive implementation of the lockdown by the government. We’ve also seen suggestions of anecdotal evidence that the fact that most South Africans have had the BCG vaccine against TB, may offer some protection against the virus compared to those who have not.

Those who doubt our low numbers may suggest that these figures are simply because there is a completely insufficient amount of testing going on and that many cases are simply unreported or unknown. Similarly, the extent of the spread in densely populated, lower socio-economic communities may also only be revealed in the coming weeks.

The big question for everyone is whether we get our “freedom” back next week or whether Cyril will decide that an extension to the lock-down is required. No one is underestimating the difficulty of this decision, the trade-offs it requires now, and the long-term impact it may have on the future of this country, and we wish the President the best of luck in deciding on the best course of action.


What others say


7 April 2020

Fin24 – Eskom tells investors it doesn’t need more state funding

“After accounting for the R56 billion of bailout funds committed this year, Eskom management estimates that it has R31 billion of funding needs for this year,” said Ali Dhaloomal, a London-based credit research analyst at Bank of America. “Eskom doesn’t see the need to ask for additional state support at this point of time.”

Business Live – SA can move from junk status to comeback kid by doing the right things

“SA faces two scenarios: establishing itself at the very top of subinvestment grade on stable outlooks across all agencies, leaving investment-grade status just one step away; or falling deeper into subinvestment-grade territory to the point of no return.”

9 April 2020

Business Tech – The rand has likely hit its ‘peak’- here’s where it is heading next

“Where we previously believed that rallies in the rand will fade (and these rallies should be sold into), we now approach the currency with more caution and take the view that weakness in the rand is more likely to fade.”

Fin24 – Goldman sees virus causing $75 billion funding hole in Africa

“The fiscal shortfall could squeeze the ability of some governments to service their debts. Zambia has already asked international banks for proposals on re-profiling its liabilities, while many others have Eurobonds trading at what are considered distressed levels.”

Bloomberg – Sub-Saharan Africa poised for first recession in 25 years

“The Covid-19 pandemic is testing the limits of societies and economies across the world, and African countries are likely to be hit particularly hard,” Hafez Ghanem, World Bank Vice President for Africa, said in a statement accompanying the report.”

What we think


Last week we wrote that “while the extent of potential further weakness is hard to call, we unfortunately believe that even with a hard, slow turnaround, this is the new reality and a ZAR recovery below 16.00 seems a long, long way off. Over the next 6 – 12 months, and possibly beyond, we feel that the new normal will become 16.00 – 18.00 vs the USD.”

It seems for now that the market has decided that our recent weakness was overdone. Indeed, prior to Fitch downgrading us further into junk last Friday, we had been trading at 18.85. Their announcement caused one (for now) final leg in the sell-off which saw us reach 19.35, from which level we have recovered steadily through the week. It’s also worth noting that our range for last week – seemingly large at 18.00 to 19.00 – has now been completely filled over the past 4 days.

So where to now?

It really is all down to how the virus plays out over the coming weeks and we suggest that continued volatility is more likely than any clear trading direction. Still our base case remains that 16.00 – 18.00 should be the expected range in the coming months.

In the near-term, an absence of bad news may allow for a test of 17.80, whereafter the next target becomes 17.30. Should things deteriorate, however, we would expect support in the 18.30 – 18.50 range.

Our range for the week ahead is therefore 17.80 – 18.30.


Have a great long weekend and stay healthy!