Market News 10 May 2021
What we know
The Rand has decisively turned around its fortunes in the past few weeks to bear down on R14 to the dollar, already having re-gained a third of its value since reaching R19 to the dollar a year ago and 8.4% since early March.
As has been our view over the last few months, we think most of the tailwinds have come from global factors, primarily the turnaround in the world’s benchmark 10-year US Treasury yield and renewed broad-based weakness in the dollar.
On the political front, last week we were delivered a nifty (if widely telegraphed) plot twist. The former Premier of the Free State has now butted up against the rarest of unicorns. The ruling party side-lined Magashule, its secretary-general, after he defied a March 29 ultimatum by top ANC leaders to vacate his post within 30 days while he stands trial on graft charges. Ace stands accused of dipping generously into a R255-million Free State contract for an asbestos audit, amongst other charges.
Under immense pressure from factions within the organisation, along with various law enforcement agencies, opposition politicians, the media and civil society, the party’s patronage is fighting mightily to retain integrity of its operations. If you’re an ANC member in good standing, this is to be celebrated.
After the news broke on Thursday, the Rand strengthened as much as 0.8%; outperforming all emerging-market peers except Brazil’s Real. Bonds reversed declines, with yields on benchmark 10-year securities falling two basis points. Investors should be encouraged by any reform regarding corruption. However, the back and forth also points to a messy and uncertain political environment in South Africa. In the bigger scheme of things, investors will likely place greater weight on real fiscal reform on a government level than a political backdrop.
Moving into the last hours of the trading week, the Rand improved on its new found swagger, hitting its highest level against the dollar since January 2020, hours before Moody’s was scheduled to publish a review of South Africa’s credit rating. The main driver was worse-than-expected US jobs data, which hurt the dollar. This was supposed to be a US jobs report for the ages. One million more Americans were expected to be added to nonfarm payrolls — and perhaps even 2 million — in a sign that the world’s largest economy was breaking out of the Covid-19 pandemic.
Instead, when the dust settled, it looked as if the US labour market had hardly made any strides forward at all — and certainly nothing close to the Federal Reserve’s benchmark of “substantial further progress.” The world largest employer added just 266,000 workers in April, missing all estimates in a Bloomberg survey of economists that pegged the median gain at 1 million.
The benchmark 10-year yield tumbled more than 10 basis points to 1.464%, the lowest in more than two months, before paring the move somewhat. That kind of knee-jerk move, particularly when it comes to short-term rates, makes sense and should hold for now. It’s going to take some time to understand exactly what caused this big miss. For investors who had their post-pandemic strategy figured out, this sudden murkiness will rightfully cause them to rip up their playbooks.
What others say
Daily Maverick – Power, the glue that kept the ANC together, now slipping out of Ace Magashule’s grasp
“As the ruling party enters an uncertain period of many new crises, a look at Magashule’s moves since becoming a national office-holder offers a fascinating opportunity to understand what his prospects for the future are.”
Business Live – Allan Gray’s eight Covid investment lessons
“Market conditions like those in 2020 really test your firmest convictions. Substantial returns were on offer for those who could distinguish between the facts and the noise — and who were right with their high-conviction beliefs.”
MoneyWeb – Economic recovery: Low rates are playing a starring role
“The repo rate will however have to remain low to increase credit extension again as the latest numbers there suggest the consumer is still scared of creating debt. Private sector credit declined at the fastest rate since May 1966!”
Financial Times – Citi weighs launching crypto services after surge in client interest
“Tuchman said Citi was in no rush to come to a decision on how deeply it should move into the crypto market. “I don’t have any FOMO [fear of missing out] because I believe that crypto is here to stay and that we are just at the very beginning of the market,” he said.”
What we think
Last week we stated that “with the recent Dollar downdraft, high domestic yields combined with improved coronavirus infection rate trends, have seen the ZAR trading somewhat like an emerging world safe-haven of late”.
FX markets have entered May split down the middle. Outperforming are the commodity currencies enjoying the global recovery cycle and backed by central banks considering tighter policy. Underperforming are the defensive low-yielders, with very distant prospects of rate hikes.
It is instructive to see that the currencies performing the best this year are those where the markets have priced the most monetary policy tightening over the next year, notably the Rand. We also think the Rand’s outperformance has been aided by the fact that dollar inflows from the $5.3bn IMF and the two $1bn NDB loans resulted in an uptick in the Rand swap basis (the implied foreign exchange swap rate versus the Johannesburg Interbank Average Rate). From a currency perspective, this is equivalent to about a 100 bps hike in the repo rate, which means the cost of shorting the Rand is currently around 100 bps higher than it should be.
The momentum of the global risk-on wave continues to prove irresistible in the short-term, meaning that the Rand continues to grind ever lower, taking any sell-offs in its stride and recovering quickly. This means that, while our medium-term view still favours a move weaker towards 14.50, the short-term still sees the potential for gains, albeit at the whim of the daily swings in the USD’s fortunes. Having dipped just below 14.00 earlier during today’s trading, the potential for a test of 13.80 becomes possible.
Our range for the week ahead is 13.80 – 14.27.
Have a great week!