15 June 2018

What we know

 

This week we’ve continued to witness significant volatility in the market. The ZAR continued to weaken against the US Dollar from the previous week, following on from the poor South African first quarter GDP release, as well as the impact of global trade wars on emerging markets.

Locally, eyes are still on the government and their anticipated approach of handling the housing protests and the noise around land reclamation, as these decisions will impact the 2019 election environment. Sources note that not only land issues remain the concern, but  also mining, education, transport, SOEs to the continued debt spiral of the public sector.

Poor domestic growth continues as seen in the economic data releases this week. The RMB/BER Business Confidence data in the 2nd quarter of 2018 and Retail Sales for April both came out weaker. The IMF (International Monetary Fund) forecasts South Africa’s growth at 1.5% this year.

None of the above is positive for the ZAR. Moreover, the US hiked interest rates on Wednesday night as anticipated by most and, even further, two increases are likely to materialise in 2018 as noted by the Federal Reserve Chairman Jerome Powell during his speech. This is bad news for the emerging market currencies.

As a result of the above we saw the USD/ZAR jump to 13.44.

The attention was turned to the ECB (European Central Bank) on Thursday as ECB President Mario Draghi announced central bank’s interest rate decision. The dollar’s momentum eased out as we approached the ECB policy meeting and we saw the USD/ZAR calm back to 13.18 by midday of Thursday. The ECB kept rates unchanged and in line with expectation. That, together with the improved US Retail Sales number, saw the market react with the EURUSD tumbling by 230 pips in just under four hours. The GBP.USD fell by 140 pips at the same time.

What others say

 

11 June 2018

Nedbank SA FX – Dollar Liquidity Squeeze

“While GDP is expected to recover in 2Q:18, our attention is focused on the upcoming current account print for 1Q:18 (due for release on 21 June). Looking at the performance of net exports within the GDP data set, the bias in our view, lies firmly for a current account deficit that could come in wider than the Bloomberg consensus of -2.8% of GDP.”

“… a wider-than-expected current account print may well carry more negative weight within FX markets than otherwise would have been the case. Keep in mind that recent rand weakness should see the value of exports rise throughout the rest of 2018.”

12 June 2018

Business Tech – These 2 events could make or break the rand this week: analyst

“…the market will look to two definite market-moving events this week – the US FOMC meeting and the ECB meeting…Reaction to these two events will be paramount in the direction in the rand, as to indicate whether the rand weakness has some more legs or whether the move was overdone and we could see EMs clawing back some losses.”

Investec Morning Reports

“Off-balance sheet liabilities such as the SOEs and the guarantees that government has sought to offer these companies has been a major factor in the ratings agencies downgrading SA’s credit rating. The fact that they are now being tackled will be credit positive. How credit positive will depend on just how successful the boards of management will be in reducing expenditure and rendering these companies as sustainable going concerns”.

RMB Global Markets Daily – Summit before the Fed

“If government does not reprioritise spending, this will push the fiscal deficit back above 4.0% of GDP, taking the government back to the 2017 medium-term budget estimate.Meanwhile, SAA, the state-owned airline, is reported to be laying off between 1,000 to 1,500 employees in a bid to reduce operating costs. No concrete response yet from the labour unions so we wait to see how they react.”

13 June 2018

Bloomberg – Emerging Markets Can’t Blame the Fed for Their Problems

“But emerging-markets officials can’t have it both ways by complaining about a weak dollar, as Mantega did in 2012, and seek relief from a strong dollar, as Warjiyo did recently. The fortunes of the dollar will wax and wane over economic cycles, so medium-term global investors should look to two sovereign risk indicators to provide some guidance… Namely, the deficit in the current account of the balance of payments, and annual inflows of foreign direct investments, and inflows of foreign direct investments.”

14 June 2018

Financial Times – ECB to halt QE at end of year 

“Mr Draghi says he can only reiterate what he has already said about rates remaining on hold “at least” through the summer – the intention is to give a time dimension but not a precise one. It is data-contingent and would be difficult to specify a precise time at which the ECB will reach the level of convergence it has been aiming at for the last six years. He reiterates the general uncertainty that has increased in the previous weeks.

What we think

It certainly has been an action-packed week!

While last week we mentioned that we were comfortable with the ZAR trading at a short-term range of 12.78 to 13.28 (with a possibility of an overshoot to the 13.40 level), the latter has since come to pass.

Further to note, ECB’s dovish stance on Thursday’s interest rate decision has since forced an investor reallocation out of the EUR (and Emerging Markets), and back into the US Dollar.

As such we think that current conditions suggest a trading range of 13.10 – 13.60. While a retest of 13 is entirely possible, the ECB conservative stance on Thursday, has since shifted our trading range upward by a notable degree.

ZAR at the time of writing: 13.41

 

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Have a great weekend!