10 August 2018

What we know

 

At our Monday morning meeting, we noted the lack of data due this week and suggested most of the recent drivers had largely been priced into the ZAR. Indeed, up until Wednesday things were fairly uneventful, as we traded a 13.27-13.47 band, comfortably within our forecast range for the week.

Local sentiment certainly remains very poor, as South Africans continue to digest the implications of the ongoing developments around land reclamation. We get the feeling that the general mood is as negative as we saw during Zuma’s final years, with any goodwill and hope seen at the start of this year now a distant memory.  Nevertheless, the ZAR’s resilience has continued to offer encouragement, largely shaking off the doom and gloom that surrounds us.

Unfortunately for emerging market currencies, the calm seen earlier in the week was completely undone by the fall-out from Turkey, which gathered momentum on Thursday and Friday. Having already lost over a third of its value since the start of the year, the past two days have seen a further 25% decline in the Lira. As at the time of writing, the year-to-date loss stands at 75%.

Since Erdogan’s re-election in June, rising pressure to raise interest rates and waning relations between the US and Turkey, continue to hurt the currency, while Erdogan himself wants greater power to dictate monetary policy. Some commentators suggest an additional 10% interest rate hike (from the already high 17.75%) may be required in order to stem the current losses. The negative contagion for emerging markets has been keenly felt over the past 48 hours, with the ZAR, Brazilian Real, Argentinian Peso, Mexican Peso and Russian Ruble, all losing between 3%-7%.

The potential impact of the Turkish crisis on the wider Eurozone also saw weakness in the EUR as it traded at its lowest levels vs the USD since last July.

Somewhat less exciting, but very significant, were comments at the weekend by Liam Fox, the UK secretary of state for international trade, that the UK will most likely exit the EU without a deal. Only a year earlier he had said “a trade deal with the EU would be one of the easiest in history”. As such Sterling joined the EUR in ending the week at its worst levels against the USD in over a year.

The major economic data releases, being inflation out of the US and GDP out of the UK, were more or less in-line and completely overshadowed by general risk aversion resulting from the above, as well as the drawn-out US-China trade tiff.

 

What others say

 

06 August 2018

Nedbank CIB Research – SA FX: Rand Vulnerabilities Emerge Again

“In an environment in which global financial conditions are less accommodative, investors are likely to be more risk-averse making substantial rand strength less likely. As we head into August, our preferred trading range for the rand is to fluctuate between a trading range of R13.20-13.50. We still maintain the view that the rand is likely to weaken as 2H18 progresses… From a technical perspective, we recommend keeping an eye on the USDZARresistance level of R13.30 and USDZAR support level of R13.61.”

07 August 2018

Telegraph – Trade War Takes A Toll As German Industry Wobbles

“German industry may be feeling the pain from the trade war as its output fell more sharply than expected last month. Industrial output slipped 0.9pc from May to June, officials said, with consumer goods production down 1.6pc and capital goods falling 0.6pc.”

08 August 2018

Bloomberg – India’s Economy Is Elephant That’s Starting To Run, IMF Says

“India is on track to hold its position as one of the world’s fastest-growing economies as reforms start to pay off, according to the International Monetary Fund… India’s economy is once again gaining momentum.Growth reached the fastest pace in seven quarters in January through March, and high frequency indicators from purchasing managers’ surveys to auto sales data show the economy is likely to grow above 7 percent.”

Investec – Morning Reports

“It is also encouraging to note that the ZAR has not collapsed in sympathy with the TRY by virtue of its status as an emerging market… quite honestly it would not make any fundamental sense to compare SA to Turkey which is dealing with interest rates that are too low, a central bank that is thought to have lost its independence, fiscal policy that is too loose and a political fracas with the US resulting in the imposition of sanctions. Increasingly there is talk that Turkey is headed for a bailout of sorts possibly from the IMF or that a major macro-economic shock will ensue if the government takes the kinds of decisions needed to settle the currency market back down including hiking interest rates further and cutting government expenditure.”

09 August 2018

Business Insider – How Low Will It Fall? The Pound Continues To Dive On ‘No-Deal’ Brexit Fears

“Michael Hewson, the chief market analyst at CMC Markets UK, said in an email: “Whether you believe such a scenario is likely or not, such is the incompetence of this government, as well as its opposition, investors would be foolhardy not to take some steps to hedge against such an outcome.”… Fiona Cincotta, a senior market analyst at City Index, said: “Brexit concerns are likely to remain the key driver for the currency until Friday when preliminary second-quarter UK GDP data will be released alongside the June manufacturing and industrial production figures.”

10 August 2018

Reuters – Bold subheadline Euro Clobbered On Turkey Turmoil As Investors Scramble For Safety

“Markets are waiting for a Turkish response to the FX crisis, and hoping for more credible monetary policy as well as diplomatic overtures,” said Societe Generale strategist Kit Juckes… “The longer the market waits, the more contagious the crisis can be, not just to emerging market assets but to developed market ones. The Swiss franc, yen, and dollar are the only ‘safe’ currencies in the very short term,” he said.

Financial Times – Lira Plunges To New Low As ECB Concerns Mount

“The lira will stay in the spotlight with Turkey’s finance minister Berat Albayrak slated to unveil “a new economic model” later on Friday, although investors showed little optimism ahead of the speech.”

What we think

 

Last week we wrote that “…the depreciating trend that we’ve seen since late March now appears set to remain entrenched. (However) we are still not anticipating a major sell-off as things stand. Still we cannot ignore global market conditions and some of the jitters being experienced both locally abroad. Should sentiment take a further knock in the near-term, we’d look to 13.62 as a possible downside target.”

Well, as the cliché goes, “what a difference a week makes”!  Anyone who watches the local currency market,knows the impact that global swings – be they positive or negative – have on the Rand, and we have now seen this happen once again. Any previous guidance we were able to take from our charts, trends and support/resistance levels, was cast aside in the face of the emerging market blow-out.

As things stand, we simply need to observe how the current bout of volatility plays out before we will be able to start ascertaining what the outlook for the ZAR may be. Should concerns regarding Turkey start to subside, our first target would be 13.90 and then 13.70, whereas continued global nervousness could see a test of November’s levels of 14.35 followed by 14.55. Our range for the week, in the face of significant volatility, is therefore 13.70 to 14.55.

 

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Have a great weekend!