20 July 2018

What we know

 

We must say this ultimately proved to be a very frustrating week for those calling the ZAR stronger. The price action for much of the week was positive with the ZAR.USD trading below the key level of 13.40 (our support level for the week), reaching as low as 13.17. Even more encouraging was the fact that any ZAR weakness back toward the 13.30 level was quickly met by ZAR buying, pushing us back towards 13.20 and suggesting further gains could be forthcoming. All of this changed on Thursday however, as profit-taking started ahead of the MPC interest rate announcement. Whether the initial weakness caused short USD covering or there was just broad risk-off is unknown; however, the downward revision of annual GDP growth to 1.2% certainly seems enough to justify the move – the ZAR under performed its emerging market peers by 1% on the day.

It’s possible that the good start to the week was aided by positive outcomes from president Ramaphosa’s pursuit for investment. By the end of last week, the president had slain two birds with one trip as he secured a $20 billion commitment from two nations in the Middle East. A $10 billion undertaking from Saudi Arabia for investment focused in the energy sector, which was matched, shortly thereafter, by the United Arab Emirates for investment focused in the mining and tourism sectors. This is certainly a good start, as the $100 billion mark seems more attainable in the short term than many would have thought.

On the negative side, in addition to the lower GDP forecast, wage negotiations between Eskom and trade unions remain unresolved as the two parties have not yet come to an agreement regarding workers’ wage increase demands. This is a major red flag, particularly with sentiment still in favour of the US dollar strength.

On the global stage, it was once again Donald Trump dominating the headlines following his summit with Vladimir Putin in which he downplayed US intelligence officials’ findings that Russia interfered with the 2016 US elections. His suggestion that he mistakenly said “would” instead of “wouldn’t” due to “double negatives” indicates he is at best, somewhat incompetent, or indeed, a liar – either way this saga is concerning. Despite this, some hawkish comments from Jerome Powell contributed to a strong USD on the week, as the greenback touched its highest levels in over a year.

The UK’s inflation rate remained unchanged in the previous month. This played out negatively for the Pound as this meant that the BoE (Bank of England) will find it hard to raise interest rates to enhance economic growth, although Britain is facing high electricity and fuel costs accompanied by diminishing wage growth. Add to this Brexit woes and one must be concerned about Sterling in the near-term.

 

What others say

 

16 July 2018

Investec – Morning Reports

“From a technical perspective note that stochastic indicators are now moving into the oversold position for the USD-ZAR, which suggests that downside potential is moderating. With the SARB rate decision looming this week, alongside some significant data domestically and internationally, investors could seek to square positions into the start of this week.”

17 July 2018

Business Report – BRICS Ambassador Vows Ramaphosa’s Investment Target Will Be Reached

“The $100 billion is a modest target. I believe we will reach that in a year,” said Sooklal, who is the South African sous-Sherpa (ambassador) for the economic bloc of Brazil, Russia, India, China and South Africa, known as BRICS… “The Chinese ambassador has said he wants to bring at least $30 billion during the investment summit, and I am sure this will materialise.”

18 July 2018

Business Day – Two Measures Show The Local Currency Is Undervalued

“…While it appears there may be room for the rand to strengthen further towards its PPP, the weaker level it got to did not happen overnight. It was caused by shifts in political and economic risk factors not only in SA but elsewhere, especially in the US. The rand is not a one-way bet.”

Market Watch – Worker Shortages, Rising Costs Hemming In A U.S. Economy Bursting At The Seams, Fed’s Beige Book Finds

“The rapidly expanding U.S. economy is running out of room to grow any faster as shortages of skilled workers and rising costs of raw materials handcuff businesses, the Federal Reserve said. The specter of increasing tariffs and a broad trade war is adding to the anxiety.”

The Guardian – UK Interest Rate Rise In Doubt As Inflation Stays At 2.4%

“The TUC general secretary, Frances O’Grady,said: “With wage growth stalling, now is not the time to hike interest rates. Household budgets are still under huge pressure.”

19 July 2018

Reuters – Dollar Stays Strong As China Grabs For Stimulus Levers

“Sentiment right now is still very much in favor of buying the dollar,” said Crédit Agricole FX strategist Manuel Oliveri… “It is positively correlated with risk appetite and risk appetite remains supported by the U.S. earnings season and there is a very strong notion among clients that there is further room for improvement.”

20 July 2018

Business Live – Pound Hits 10-month Low As World Cup Fever Hurts UK Retail Sales

“Today’s results are part of a continuing trend. Retailers in general have been under intense pressure over the past 18 months as squeezed consumers hold back on spending in the face of higher prices and sluggish wage growth. Big names such as Marks and Spencer, Mothercare and House of Fraser have been closing stores in order to reduce costs. Meanwhile, internet spending continued to break news records.”

What we think

 

We said last week that “our forecast for the week ahead reflects a strengthening bias in a 13.30 – 13.60 range” while also suggesting that “the key here for us remains that 13.40 level and it may be that that figure is crossed and re-crossed in the weeks ahead”.

Both of these views came into play this week. We saw the strengthening momentum continue as we reached the best levels in over a month at 13.17, before the sell-off which pushed us back into our range and above the 13.40 level (infact, we very briefly the upper bound of our range at 13.62 in the early hours of Friday morning!)

So where does this leave us? Well, we haven’t given up quite yet and believe that the price action of the past two weeks (i.e. consolidation between 13.20 and 13.60) could still be key in setting up a re-test of the 13.00 level.

When the 1st Quarter GDP figure of -2.2% was released in June, we felt the sell-off from 12.50 to 13.20 (notwithstanding external factors such as global sentiment and USD strength) was justified, such was the weakness of that figure. Since then we have largely been calling the weakness beyond that overdone, suggesting some strength could lie in store. As such yesterday’s revision to GDP by the SARB, does not impact on our short- to medium-term outlook, albeit that we can appreciate the market’s reaction yesterday.

Although volatility has appeared to have ticked up, we continue to expect a range of 13.30 – 13.60 in the week ahead.

 

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Have a great weekend!