September 18, 2020
Market News 18 September 2020
What we know
Go the Rand! After 3 weeks of consolidation in the 16.55 – 17.00 range, it was the ZAR bulls who’ve gained the upper hand. Having started the week above 16.70, Tuesday saw the decisive move down through the key 16.55 level, and we never looked back, moving fairly comfortably through the next target of 16.35 and touching a low of 16.10 this morning.
A subtle shift in sentiment
Not since March 16 have we traded as strongly against the USD, and although the same can’t quite be said for GBP and EUR, we’re not that far off the best levels against those either. Our regular readers will know that we’ve been slight ZAR bears over the past few months, favouring a ZAR.USD in a 16.90 – 17.30 range, so this move has certainly exceeded our expectations.
Trying to understand why this may be the case, we suggest that there has perhaps been a slow but ongoing shift in sentiment towards South Africa, in particular with regards to two areas:
1) Relatively high real yields: while many would suggest this factor has always favoured the ZAR, there have been times over the past 6 months where risk-off sentiment and caution, has seen the impact of attractive yield be lessened. Over the past 4-6 weeks, as risk appetite has improved, markets have rallied and investors have started to seek out higher yielding assets, the carry-trade (as the search for higher yielding currencies is often called) has regained momentum. It’s important to note that not only does SA have higher real yields than the major currencies, but also when compared to our emerging market peers.
In a week where the Fed again confirmed that rates will remain low for the next few years and the SARB kept rates unchanged, the yield differential gave additional impetus to the Rand’s recent rally.
2) Fight against COVID-19: having been slated for reacting to the virus too aggressively, too early, one gets the sense that the government’s hard early lock-down is paying dividends. While no one can rule out a second wave of infections, for the time being things appear to be relatively under control, at a time when the rest of the World continues to struggle. India is currently under the most pressure in terms of daily numbers, Russia sits in third place in terms of total infections and any number of South American countries appear in the top 10.
The gradual reduction in new case numbers over the past few weeks, culminated in a further relaxation of restrictions, providing another boost to the economy.
While SA certainly has its own massive economic and structural problems, there are hardly any countries in the world that aren’t currently under similar pressures. Indeed, Brazil, Argentina and Turkey are under enormous strain, with the latter two trying (seemingly in vain) to protect their currencies.
The net result of the above? Over the past month the ZAR has outperformed its emerging market peers by 3% – 15% and this week by 1.5% – 4.5%.
It often unclear whether we are seeing ZAR strength or USD (or GBP or EUR) weakness; however, make no mistake, this is a bullish Rand.
What makes sense?
On April 3rd, when the current mess was really starting to kick off, and the Rand moved above 19.00 for the first time, we wrote: “While the extent of potential further weakness is hard to call, we unfortunately believe that even with a hard, slow turnaround, this is the new reality and a ZAR recovery below 16.00 seems a long, long way off. Over the next 6 – 12 months, and possibly beyond, we feel that the new normal will become 16.00 – 18.00 vs the USD.”
It took until 21 May for us to move below 18.00 and into our medium-term range again and there’s been no shortage of volatility since. So while we’ve been able to justify/explain the recent move to current level in the previous section, as well as in the context of the “new normal” we mentioned in April, where to now?
In the medium- to long-term our view remains the same: significant damage has been done to our economy and balance-sheet and the country is fundamentally in a worse position from which to deal with and correct so many of the issues that need to be addressed (ballooning debt, failing SOE’s, huge unemployment). Yes, the global economy and other countries are also in tatters; however, we were not on a strong footing to begin and we certainly don’t have the luxury of potentially being able to spend our way to a quicker recovery, as the US, UK and Europe may be able to do (thank you again, Zuma and your cronies). As such we see the 12-month outlook remaining 16.00 – 18.00. The only reason we think we could see 15.50 (at best) would be if the USD itself continues to come under pressure, i.e. further Dollar weakness.
Is the rally done?
The key area in the below chart is the green shaded area which represents the 3 weeks of consolidation between 16.55 – 17.00. The 45c range that covered is what we’d refer to as the measured move and would be the extent of the move of any break-out seen, be it to the upside or downside of the range. Have broken to the downside, the 45c move from 16.55 would imply a move to 16.10 and indeed we’ve seen that level touched this morning. As a rule of thumb, we’d therefore expect that level to provide some support. However, given how close we are now to the “big figure” of 16.00, it may be that traders will target that still. Should 16.10 hold, we’d expect a move back to 16.40. Click here.
What others say
Daily Maverick – The claim that SA’s economy has declined by 51% is a misrepresentation of the facts
“StatsSA reports our quarterly GDP data on an annualised basis, as it did with the data released on 8 September 2020. In essence, the annualised data assumes that the quarterly trend of GDP would grow or shrink as if that rate of change is sustained over a period of 12 months. Since GDP growth compounds on itself, the calculation is a little more complex than multiplying by four (because we have four quarters). The data is then adjusted for seasonal patterns – hence, the annualised seasonally adjusted GDP growth rate. Ordinarily, from one quarter to the next, GDP data does not fluctuate dramatically, so the annualised data is a useful approach, and we can compare GDP growth rates in this annualised fashion.“
eNCA – Rich nations have cornered half of future COVID-19 vaccine supply: Oxfam
“Supply deals have so far been agreed for 5.3 billion doses, of which 2.7 billion (51 percent) have been bought by developed countries, territories and regions, including the US, UK, European Union, Australia, Hong Kong and Macau, Japan, Switzerland and Israel.“
Bloomberg – End of easing cycle makes for a picky time in emerging markets
“The diminishing willingness of policy makers to reduce interest rates — not to mention their scope to do so — underscores the growing recognition across the developing world that after the wave of stimulus thrown at these economies amid the Covid-19 pandemic, inflation is edging up again. It’s a realization illustrated by the surge in demand for emerging-market inflation-linked bonds, which has pushed down yields on some of the securities to record lows.”
MyBroadband – In-store payments show South Africa’s economy is recovering
“FNB said that signs of this recovery were already apparent in July, where purchase activity had risen to roughly 86% compared to pre-pandemic levels.
“Early indications are that volumes recorded on FNB Speedpoint devices across the country would have largely recovered by the end of September in anticipation of further easing of operating restrictions,” said FNB Business CEO Gordon Little.“
BusinessTech – What to expect from Ramaphosa’s new recovery plan for South Africa
““Social partners have identified priority areas for rebuilding the economy as well as structural reforms and other programmes which will enable sustainable and inclusive growth with an intensive focus on job creation,” the presidency said.”
What we think
Last week we wrote that “…until we see more conclusive evidence of a break-out of the current range, we’ll be sticking to our guns regarding our forecast trading levels, notwithstanding that we favour such a move to be weaker (above 16.90) rather than stronger (below 16.55).”
Well sometimes one gets it (horribly) wrong! At least our clients are happy about this, as we’ve had our busiest week in 5 years.
With the conclusive break-out now having taken place, we need to adjust our short-term view. As mentioned in the previous section, 16.40 could prove the resistance level for any unwind of the current rally, while 16.00 is the obvious bullish target which, if reached would probably see a bit of an over-extension to the 15.85 level.
In the next commentary we’ll be mentioning some of the key upcoming events that should ensure that the final quarter of 2020 will be an interesting ride; however, for now our range for the week ahead is 15.85 – 16.40.
Have a great weekend!