October 09, 2020
Market News 09 October 2020
What we know
The pleasant surprise this week was a relative lack of volatility in the currency markets. Despite everything going on in the world at the moment, the major currencies traded in fairly tight ranges and this carried through to the Rand as well. While Monday saw us trade as strong as 16.36, the bulk of trading for the rest of the week took place in a 16.50-16.70 range.
While the news continues to come thick and fast – Trump vs Biden, Trump vs Covid, Covid vs The World and the Hawks vs The Corrupt – this week, we’re rather going to highlight the key factors to look out for in the final quarter of 2020.
2020 Isn’t over yet, not even close…
While very few people are going to look back fondly on 2020, for currency markets there’s still plenty to watch out for in the coming months. In descending order of importance (in our opinion), the major events likely to impact on the ZAR are:
- US election
3 November: The Democrats have said this is “…a battle of the soul of our nation” and while it’s easy to dismiss that kind of language when it comes to politics, there is no doubt that this election will be incredibly important in shaping the short-term (next 4 years) and long-term outlook for the US and its role on the world stage. Whether Trump or Biden prevails, the market will start pricing in many key considerations, both for the short- and long-term.
- Immediate issues to consider would include whether the on-the-ground fight against COVID-19 will look substantially different under a Democrat White House and what the extent of financial stimulus would look like.
- Medium-term would bring into focus the usual Democrat/Republican differences in terms of taxes, healthcare, etc. and how the market and economy would respond to the inevitable policy changes.
- Long-term the discussion would be around what (if any) damage has been done to the US’s relations with the rest of the World and its position as the last true global super-power, and whether the Democrats – should they prevail – can repair this.
- South Africa mid-term budget update & ratings update
21 October: We’ve mentioned recently that global events are the main drivers of the Rand’s price action and that domestic issues have largely taken a back-seat. This is likely to change in the coming weeks as Tito prepares to update the country on what shape the budget for 2020/2021 is in. In focus as always will be revenue collections, economic growth (or stagnation) in the face of the pandemic, the performance of SoE’s and our debt ratios.
The outcome of this update will in turn flow through to the market’s outlook regarding the ratings agencies’ review the country’s credit rating, expected in November.
- COVID-19 pandemic
As things stand, the market seems to be taking recent developments around the virus in its stride, despite the US, India and Brazil still reeling (having at no point started to get their problems under control) and many countries throughout the World seeing rise case numbers again. Thus far, it appears as though South Africa is still faring fairly well, with new reported cases seemingly under control and our health-care system coping.
For the Northern Hemisphere, the concern remains whether the oncoming winter will contribute to a further spike in cases. On the other hand, we can only hope that each passing day gets the world closer to a roll-out of a vaccine.
- Brexit… still
Those not living in the UK or Europe would be forgiven for not realising that Brexit is “still a thing” however, it is indeed still bumbling along. Who knows what the various deadlines mean anymore, as we see extensions being granted and negotiations continuing, even as the UK has threatened to ignore previously agreed upon terms. In a year like 2020, UK-Euro divorce may have taken on reduced significance than in “normal” times; however, the outcome will obviously have a major impact on the performances of the GBP and EUR between now and year-end.
Not much to report
In the absence of any major news, the Rand continues to feel fairly comfortable at current levels. The chart below shows that the two most recent sell-offs have not lead to any major moves and, as things stand, the strengthening channel which started on 25 September (the area between the yellow lines on the graph) remains intact. A move to 16.40 seems possible after which the trading range would be fairly broad between 16.10 – 16.40. On the other hand, should we see weakness return, the first target would be 16.60 and 16.90 thereafter.
What others say
The Economist – How investors are hedging against possible election chaos in America
These jitters are most easily observed in vix futures, derivatives that measure the level of volatility in stocks. Because periods of very high volatility are correlated with plunging share prices, vix futures are often traded by investors as an insurance policy against losses in the s&p 500. Because there is usually more potential for volatility over longer time horizons, longer-dated vix futures tend to be more expensive. They also tend to be dearer around uncertain events that are likely to prompt volatility, such as elections or even important central-bank meetings.
Business Tech – Moody’s sends warning over South Africa’s shrinking tax base
Moody’s said that under-performing revenue has been a key credit challenge in South Africa for an extended period. At the same time, opposition from influential stakeholders including unions has constrained the authorities’ ability to contain spending in response, it said.
Financial Times – Brussels resists plan to safeguard post-Brexit share trading
The problem arises because of an EU rule, known as the “share trading obligation”, or STO, that limits trading on exchanges outside the EU once a particular share is regularly bought and sold on venues inside the 27-nation bloc. There are many such dual-listed companies including Ryanair and Tui, the travel company. London is the biggest centre for share trading on the continent and handles up to 30 per cent of the €30bn-a-day market on exchanges such as CBOE Europe.
New York Times – Trump is killing the economy out of spite
The question is, why did Trump choose to reject even the possibility of a deal less than a month before Election Day? True, it’s too late for legislation to make much difference to the state of the economy on Nov. 3, although a deal might have averted some corporate layoffs. But it would surely be in Trump’s political interest to at least look as if he’s trying to help Americans in distress. Why would Trump choose this, of all moments, to torpedo economic policy?
What we think
Last week we wrote that “…even if SA continues to feel “stable” for now and the Rand outperforms its peers, our performance against the major currencies, should continue to be driven by USD moves, global news and general market sentiment and risk appetite. Of course this means that forecasts become even more difficult than usual and our range for the week is therefore a pretty wide 16.40 – 16.90.”
It was actually a relief to have a fairly calm week for the first time in a while, and it’s hopefully allowed everyone to gather their thoughts in terms of the ZAR outlook and how to plan for their currency trades.
Our view remains largely unchanged and we once again remind clients to base their decisions on their personal requirements, views and risk appetite, while being aware of some of the major events highlighted earlier.
Our range for the week ahead is 16.30 – 16.75.
Have a great weekend!