11 May 2018

What we know

 

Increased volatility remained the order of the day as the ZAR continued to be buffeted by global economic and political forces this week.  For much of the week it looked as though the negative bias of the ZAR.USD would continue as it has for the past few weeks, until a strong rally on Thursday saw us reach the best levels since April.

As has been the case of late, the drivers remain global in nature, with any local news being somewhat of a side-show with regards to the Rand’s fortunes.

The main focus of late has been the USD’s continued resurgence.

Commentators have been suggesting this may be starting to run out of steam and indeed Wednesday did bring the start of a 1% pull-back against the basket, following soft inflation data out of the US.

Particularly relevant for the ZAR, as an emerging market currency, has been the situations in Argentina and Turkey, as inflationary concerns and rising interest rates put those two currencies under severe pressure. Indeed it is thought that Argentina will request a $30 billion bail-out from the IMF, bringing back memories of that country’s 2001 default, in response to which the ZAR (and many other emerging currencies) fell 20% against the USD.

Although Donald Trump’s decision to withdraw from the Iran Nuclear Deal was widely expected, the announcement has obviously further raised concerns about heightened tensions in the Middle East and the World will now be watching to see if and how the situation is resolved. Aside from the oil price ticking up – certainly a concern in terms of how it may impact global growth and local inflation – the market response to withdrawal was fairly muted.

The only way for something resembling the status quo of the past 3 years to remain in place, would seem to be if one of Trump, Putin or the Iranian leadership backs down in one way or another – this is a stubborn bunch, so we watch in anticipation!  Bear in mind that Trump’s tiff with North Korea did ultimately prove to be the spark that led to the formal end of the Korean War after 68 years, so who know what could happen.

There was not much in the way of big economic data this week.  SA’s mining and gold production figures were weak, US inflation was soft, while the BoE’s decision to leave rates unchanged, although expected, did see Sterling on the back-foot as some investors had positioned for a potential increase.

 

What others say

 

07 May 2018

Eyewitness News – Rand weakens as dollar strength bites

“The US dollar strength observed since the beginning of May is testing emerging market resilience. South Africa and Turkey are both vulnerable due to high financing needs,” … “We expect trade tensions and Nafta (US, Mexico and Canada) trade talks to negatively impact the rand, therefore we do not expect meaningful gains this week” Rand Merchant Bank analyst Isaah Mhlanga wrote in a note.”

Bloomberg – Ignore the Emerging-Market Selloff; This Time (Really) Is Different

“We continue to be quite cautious on Turkey,” said Jean-Charles Sambor, the deputy head of emerging-market fixed income in London at BNP Paribas Asset Management. “But developing currencies as a whole are “massively undervalued” for buyers who have a one- or two-year horizon, there could be some volatility in the next couple of weeks. Overall, we see that as a buying opportunity.”

08 May 2018

Nedbank SA FX – It’s all about the U.S Dollar, rand converges to our target levels 

“…we believe that the rand will continue to trade in-line with the international environment which will be dictated by the U.S Dollar. Should the U.S Dollar continue on its path stronger, we leave the likelihood open that the rand will move closer to our R12.80 target, which we only expected to materialise in the second half of 2018… Short-term, we recommend keeping an eye on support at R12.43 and resistance at R12.68 (see our latest Technical Strategy note: “The US Dollar breaks out” of 3 April 2018 for a more detailed technical view on the currency).”

CNBC – Bonds – US Treasury yields fluctuate as investors await Iran deal announcement

“…the U.S. central bank’s interest rate hikes may not end up having as great of a risk on emerging market economies and stock markets as many had initially thought.” said Fed Chair Jerome Powell

Times Live – Trump’s decision on Iran could have massive implications for South Africa

“… Trump has introduced a lot of uncertainty. People would tend to be cautious in the event of old sanctions being reintroduced‚ or new ones coming into being. And as you know‚ businesses are risk-adverse. So, until there is clarity‚ there will be some reservations about investing.” said Gordhan

Business Insider South Africa – This graph shows how much better the rand is doing than its peers, and one expert thinks it can go to R11/$

“Policy certainty will attract investment, which will drive growth and attract more investment in turn. South Africa has a diversified economy, which has capacity to support more growth through its various institutions, both public and private… If South Africa can get all stakeholders (private and public) on side, the rand could strengthen towards R11/dollar, given a favourable commodity cycle, rising optimism and accelerating growth,” said Kevin Mattison, managing director of Avior Capital Markets”

10 May 2018

CNBC – Argentina looks to be headed for another economic storm

“Argentina is still a difficult country and unless they do reforms then it’s going to behaving issues,” Michele Gesualdi, the Chief Investment Officer at Kairos Investment Management, told CNBC’s “Squawk Box Europe” Wednesday. Meanwhile, Christine Lagarde, managing director of the IMF, said in a statement Tuesday that Argentina is a “valued member”of the Fund. “Discussions have been initiated on how we can work together to strengthen the Argentine economy and these will be pursued in short order,” she said

RMB Global Markets Daily – Kicking and Screaming it is then 

“We can expect the local bond market to trade on the back foot ahead of this afternoon’s US CPI print. While the yield curve continues to steepen, the back end of the curve is starting to look attractive again, and we expect interest to return once the volatility in global yields dies down.””

What we think

 

On a number of occasions earlier in the week the ZAR.USD level of 12.50 was tested yet managed to provide some good support. When it was finally broke on yesterday, it was with some force as we traded as low as 12.31, representing a rally of over 3% from Wednesday’s lows.

The next support level is 12.30 and a break through there could set us up for a move back to the 11.80 – 12.20 range which held for most of February through April. Given the aforementioned factors however, we feel that may be too much to ask in the near-term.

Locally, from both an economic and political viewpoint (albeit with the major parties upping the ante ahead of next year’selection), we continue with our period of post-Zuma consolidation which, as we’ve mentioned in numerous commentaries, will be a long and hard process.

As such the outlook remains closely aligned with global factors and we feel a 12.30 – 12.70 range remains most likely in the near-term.

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Have a great weekend!