August 14, 2020
Market News 14 August 2020
What we know
It was a short and fairly uneventful week and, for the most part, the Rand traded in the type of range-bound consolidation we’d hoped. Our clients were actually quite fortunate that Monday was a public holiday, as we saw by far the worst trading levels at the start of the week, with the Rand just about touching 17.80 on Monday morning. Thereafter things settled down quite nicely as volatility dropped, with most of the trade from Tuesday until now taking place in a 17.35 – 17.55 range.
81 days until Biden (and Harris) v Trump (and Pence)
While the usual themes of the past few months continued to play out in the background – US/China tensions, coronavirus developments and global economic struggles – the main story of note was Joe Biden announcing that he has chosen Kamala Harris to be the Democrat nominee for vice-president. A strong, impressive candidate, it was hard not to wonder whether the roles shouldn’t have been reversed, and we should have seen Harris unveiling Biden to be her VP! The more one watches and listens to Biden, as he seemingly struggles to find and say the words he wants, the more one understands how Trump is still in contention for re-election, despite his abhorrent showing since (at least) the start of this year. Come 3 November, America will seemingly have to choose between two equally unimpressive candidates (albeit for entirely different reasons). It may be that the only real winners are China and Russia…
Of concern for the USD is that, despite its recent pummelling, the slight attempt at a rally that we’ve seen over the past 10 days or so has been pretty insipid.
Easing of lockdown to ease Rand woes?
While most of our major emerging market peers saw their currencies strengthen this week, the other possible reason behind the Rand’s gains may well be the expectation of the lock-down being eased further in the coming days. While we would expect incremental changes to take place across most sectors, it would be hard to argue that reduced restrictions around alcohol and tobacco products will be very high on most peoples’ agenda, if not for personal benefit, then at least to allow our hospitality industry to get back on track in a meaningful way. A sense that the chokehold on the economy is slowly being loosened can only be ZAR-positive. Unfortunately, the unwelcome return of load-shedding may serve to offset this cautious optimism…
Is the worst over for now?
Our forecast trading range for this week was 17.30 – 17.80 and we noted last Friday that we thought the sell-off was perhaps overdone. Given that the Rand traded between 17.33 -17.78, we’re feeling pretty chuffed with ourselves right now!
The chart below also shows that our feeling regarding the rapidness of the sell-off being too much, appears to be justified: the ascending wedge formation of the two red-lines has been broken as the sell-off has stalled in the face of the recent consolidation. While we’re by no means suggesting that we’re out of the woods in terms of weakness in the future, for now we continue to favour a return to the 16.90 – 17.30 range (the two thick green lines below).
What others say
10 August 2020
MoneyWeb – Three risks weighing on emerging markets all start with T
“The trade picture may be more worrisome. The potential for US-China tensions to escalate further with a planned review of their phase-one trade deal around Aug 15 will probably damp risk appetite. Trump’s move to ban US citizens from doing business with the TikTok and WeChat apps pressured developing-nation stocks, currencies and local-currency bonds on Friday.”
11 August 2020
Zero Hedge – WHO vows to “review” Russian COVID-19 vaccine, top US scientist slams Putin’s “reckless” move
“Kirill Dmitriev, the head of the Russian Direct Investment Fund, the project’s main financial backer, confirmed Tuesday that Phase 3 trials are ready to begin on Wednesday, while mass production likely won’t begin until September or October. More than 20 countries have already ordered doses, he added. Jasarevic added that the process being undertaken by the WHO to review the Russian vaccine would be the same undertaken for any other vaccine project.”
12 August 2020
Business Maverick – Reading the dollar doldrums
“With the exception of Lebanon, Turkey, and a few other countries that have experienced even sharper exchange-rate depreciations than the US, most currencies have strengthened against the dollar. But among those with appreciating currencies, the reactions to this generalized phenomenon have been far from uniform.”
13 August 2020
Reuters – In China, fears of financial Iron Curtain as US tensions rise
“Chinese officials and economists have in recent months been unusually public in discussing worst-case scenarios under which China is blocked from dollar settlements, or Washington freezes or confiscates a portion of China’s huge U.S. debt holdings.”
14 August 2020
Bloomberg– Four charts show how South Africa’s shrinking economy is hurting banks
“Standard Bank Group Ltd., the continent’s biggest lender by assets, has guided toward a 30% to 50% first-half profit slump when it releases results on Aug. 20. Absa Group Ltd., which is scheduled to report on Aug. 24, expects earnings to decline as much as 85%.”
What we think
Last week we wrote that “…our conviction over the past 4/5 weeks (was) that the Rand was too strong means (and) we believe that the market’s assessment of the fundamental state of the world, and the risk associated with it, has been wrong and we are now seeing that unwind. Nevertheless after such a rapid move weaker, we now think that we are potentially into oversold territory and would think that further weakness should be capped around 17.80 in the short-term. Our conviction in terms of the short-term ZAR direction is now fairly low and we rather favour seeing how the next week’s trading plays out, in order to see some kind of consolidation and a possible new trading range.”
You know, it’s really nice to no longer feel as though we’re the most bearish people in the room! After weeks of saying the Rand is too strong, we’ve finally been able to say that we think a slight strengthening may be in order. We do reiterate that we are not suggesting a move back to 16.50 – as things stand this could not, in our opinion, be justified – but rather that we may see a move back to the low 17’s. As always, any unforeseen shocks could derail this scenario.
Our range for the week ahead is 16.90 -17.30.
Have a great weekend!