January 18, 2019
Brexit Uncertainty Intensifying
What we know
This week, attention was focused squarely on the UK, with the market hoping some kind of clarity regarding Brexit may be forthcoming. In the end things were fairly predictable: Theresa May’s proposed divorce deal suffered the greatest parliamentary defeat by a UK prime minister in a century, Jeremy Corbyn petulantly called his motion of no-confidence which was marginally defeated and we once again found ourselves waiting to see how the saga may play out in the coming weeks and months.
Sterling actually spent most of the week strengthening, the implication that the worst has potentially been priced in over the past months. Nevertheless, with the current lack of clarity one cannot rule out tough times ahead for the Pound.
Locally, the SARB – its hand somewhat tied by a stuttering economy – left interest rates unchanged with Repo at 6,75%. Despite this outcome being the overwhelming consensus, the ZAR did rally ahead of yesterday’s announcement, possibly as a result of some traders taking some insurance in the event of a surprise hike.
While these two factors dominated the past week,they were not market-moving for the ZAR. The final section of this article, What We Think, highlights those factors we believe to be of most importance as we look forward to the year ahead.
What others say
14 January 2019
Fin24 – Traders Suddenly Dare To Believe In An Emerging-Market Rally
“…Emerging-market spreads are narrowing, while stocks and currencies have just clocked up their biggest weekly rally since early November. And a Bloomberg foreign-exchange index that measures carry-trade returns from eight emerging markets, funded by short positions in the dollar, just climbed for a fourth week, its longest winning streak in almost a year.”
15 January 2019
Forbes – Trump’s Tariffs Are Siphoning $35 Billion From Consumers And Corporations
“…Trump’s view of trade is that if you run a deficit you are losing or a sucker. This isn’t correct. American’s have benefited by being able to buy lower priced goods or products that would not have been available if they weren’t built in China.”
16 January 2019
MoneyWeb – Tanking Economy Snaps Zimbabwe Dream Of Post-Mugabe Revivals
“Hopes of an economic revival in Zimbabwe lie in tatters 14 months after President Emmerson Mnangagwa took office, as the nation reels from foreign-exchange and fuel shortages, strikes and a dearth of political leadership.”
“…A turnaround looked conceivable after Mnangagwa, 76, took power in November 2017 and won a disputed election in July last year, but his pledges to create jobs and draw billions of dollars in foreign investment remain unmet, with businesses and consumers crippled by the lack of foreign exchange.”
17 January 2019
Daily Fx – US Stocks Temporarily Soar On Rumour US May Roll Back Chinese Tariffs
“The US stock market just experienced a roller coaster ride in afternoon trading as conflicting headlines regarding tariffs and the US-China Trade War came across the wires from the Wall Street Journal and CNBC. Just as the S&P 500 began to pull back from a heavy resistance at the 2,625 level that formed a triple top, news spread that the White House is considering rolling back tariffs on China. Stocks immediately jumped on the news and quickly reached fresh intraday highs well above prior resistance.”
“Shortly after, however, CNBC received report from the Treasury Department spokesperson that “Neither Secretary Mnuchin nor Ambassador Lighthizer have made any recommendations to anyone with respect to tariffs” which caused stocks to erase nearly all of the short-lived gains.”
18 January 2019
Fin24 – Oil Slips As Record US Production Undermines OPEC+ Supply Cut
“..While nationwide inventories dropped for a sixth time in seven weeks to the lowest since early November, stockpiles of gasoline and distillates rose by more than twice the amount estimated in a Bloomberg survey – a troubling sign for crude demand.”
“Saudi Arabia slashed its crude shipments to refiners in the US by 32% to 684 000 barrels a day in the week ended January 11, after exporting more than 1 million barrels a day the previous week, according to preliminary data from the EIA.”
What we think
It’s been a while since we’ve written and, all things being equal, little has changed our view from early December that a “healthy” trading range for the ZAR should be 13.60-13.90. We include our comments for the first half of December below:
The 13.70 level did prove relatively stubborn and sure enough, once that broke,13.60 proved a bridge too far. Looking to the week ahead, we’re widening our range slightly to 13.60 –14.00. Although we remain bullish that the ZAR could remain in the 13.00’s for the foreseeable future, we may be seeing recent momentum start to slow somewhat, as well as some complacency starting to creep in to the ZAR outlook, especially when one considers how poor recent economic data has seemingly been ignored. While still favouring a retest of 13.60, touching mid-week’s highs of just under 14.00 cannot be ruled out.
We’ve ended the week in an essentially “as you were” scenario. We will maintain a neutral view as long as we remain in a 13.60 – 14.00 trading range, but given the jitters seen this week, we believe that we are now more susceptible to possible weakness. There is no doubt that, unless the USA-China issue rears its ahead again (one way or the other), the major event for next week will be Tuesday’s Brexit vote. In our mind this certainly does favour a cautious approach, at the very least until the result of the vote is known.
Given that the weakness into the mid-14.00’s did indeed prove to be overdone, that range is back in play. The big caveat now, however, is that there are a number of major potential sources of volatility, as well as issues that could lead to significant global risk aversion. Some are old, some new, and include:
- US/China trade issues
- US Govt shut-down and Trump’s attempt to declare national emergency
- SA budget next month
- Eskom and SEO turnarounds
- Elections in May
We’re not going to attempt to forecast any outcome or impact from the above, other than the obvious high-level observation that the items highlighted could significantly impact the ZAR. On the other hand, the USD itself is potentially looking somewhat vulnerable at the moment – although there could be significant support preventing the USD index dropping below the 94 level, should that be broken, it may be that last year’s lows of 90 are targeted. Should that happen then it opens the possibility of low 13.00’s being reached.
At current levels, given the known risk events (not to mention the unknowns), externalising at least portion of one’s funds could be prudent, when considered from a risk-management point of view.
Our range for the week ahead is 13.70 -14.00.
Have a great weekend!