January 18, 2021
Market News 18 January 2021
What we know
Whereas the first week of 2021 brought with it one of the bigger losses for the Rand of late, last week saw a small recovery, followed by a few days of consolidation in the 15.10 – 15.30 range. The obvious question now is whether the next move after this pause sees us recover towards 15 or weaken to 15.50 (15.00 – 15.50 being our current neutral range).
We attribute the recent weakness to two main factors, the first being general risk aversion to emerging market assets having picked up of late, and the second being a small recovery in the USD off its recent lows. In a climate of such heightened uncertainty pervading the World, explaining the reason behind these moves (i.e. determining cause and effect) is incredibly difficult; however, we currently see things as follows:
1) Things can’t get worse for the US in the short-term (can they?)
In the week when Joe Biden finally gets inaugurated and Trump hopefully (however unlikely) disappears into the sunset and is never heard of again, perhaps we’ve seen the nadir in the reputation and outlook for the US. Any signs of the country increasing the momentum of its vaccine rollout, together with hints of economic stability, could be enough to spark a more sustained USD rally. Indeed, both Morgan Stanley and Wells Fargo last week suggested that the short-USD trade has become somewhat crowded and over-stretched, implying the odds of USD gain may be improving.
2) SA is suddenly so far behind the COVID curve
For much of the final quarter of 2020, South Africa seemed to be in a good place with regards to its fight against the pandemic. Numbers were consistently moderate, the Health System was coping and, globally, vaccine developments were boding well for everyone. Six weeks later, however, we find ourselves in a far more dire situation and while we feel the government has actually done a good job since the start of the pandemic last year, the lack of clarity and transparency around vaccination plans may very well be undoing so much of the work done to fight this. As currencies reflect the relative prices between different countries and their economies, so will the relative successes and failures in fighting the virus be factored into exchange rates.
3) February budget speech and Eskom
While markets are forward-looking and surely can’t be pricing in a good budget by any means, the risk of negative budget surprises must surely be higher than the potential for a positive surprise? Mounting debt, limited economic growth, higher unemployment, inevitable tax increases and likely “special line items” and allocations to fight the virus and shore up the economy, all point to a bleak address by the Finance Minister next month. Meanwhile, although load-shedding has thus remained fairly limited (and largely ignored by the currency market) thus far, the possibility of further negative shocks from Eskom remains high.
What others say
ZeroHedge – Looking through an adversary’s eyes: A KGB agent’s prophecy
Human beings have a weakness: It is easy for us to see others’ problems, but not our own problems. Actually, most of us are nearly blind to our own problems. However, if we examine how our enemies look at us, some insights may be revealed. For many people right now, the aftertaste of the 2020 presidential election is bitter. They feel that something is very wrong with our country. But what is it? For current events, it may be useful to look through the eyes of an adversary that many thought had been vanquished: the USSR in the 20th century.
The Atlantic – A word on statistics: A poem by Wisława Szymborska, published in The Atlantic in 1997
In “A Word On Statistics,” Wisława Szymborska takes the language of data, with its air of easy certainty, and uses it to measure some of the messiest, most complex aspects of human nature. The result is absurd, and it underscores how ill-equipped those quantitative measurements are for answering the biggest questions in life.
Daily Maverick – Africa’s Covid-19 response has been admirable, but the economic costs will linger for years
The economic impacts of Covid-19 for Africa are expected to cause the first recession for the continent in 25 years, threatening to undo years of economic progress. Government interventions to combat the virus have been effective from a public health perspective, but they are not economically sustainable.
Financial Times – Markets approaching a boiled frog moment
“Betting that asset valuations will fall back to meet the dire global economic picture has proven to be a fool’s errand in the face of overwhelming support from central banks. Fund managers have largely mentally moved on from the coronavirus crisis that is still jamming up hospitals and locking down economic activity around the world. Faith in vaccines has taken over.”
Bloomberg – The Rich are minting money in the Pandemic like never before
“For them, not only has it been relatively easy to carry out their white-collar jobs from home. But the Federal Reserve’s unprecedented emergency measures — including slashing benchmark rates to zero — have padded their wallets too. They’ve refinanced their mortgages at record low rates, purchased second homes to get away from cities and watched the value of the stocks and bonds in their investment accounts surge.”
What we think
In the first section we outlined our thoughts regarding the current “state of play” and we realise this must surely come across as us being very negative or bearish in our Rand outlook. The challenge is, that in writing out a list of factors in favour of Rand strength or weakness, at the moment there are simply more negative risks. Outside of improved global risk appetite and the still higher yields available to investors in SA, there is little fundamental about which to be positive. Furthermore, there are thoughts emerging that the relative yield differential may start to unwind in the medium-term, meaning that fast money could flow out of SA bonds just as quickly as it arrived.
It’s a finely balanced position now, as we look to see whether the bullish Rand momentum of the fourth quarter returns; however, in the medium-term we can’t help but feel a move towards 16.00 is a distinct possibility.
Our range for the week ahead is 15.10 – 15.60.
Have a great week!