August 23, 2021
Currency News 23 August 2021
What we know
Amid the frenzied activity on the JSE last week, local news flow appeared to be lost, with the government’s proposed plan to have South Africans put 12% of their income into a state-controlled pension fund seemingly going unnoticed. The intention of forming a robust social security system is undoubtedly noble but the viability of the proposal rests on the National Treasury’s ability to convince an already highly taxed society of the programme’s benefits and its ability to manage the funds in an orderly manner. Needless to say, the proposal was met with predictable outrage and one can understand why. As marketing expert Mike Sharman put it: “Great idea… if your government isn’t run by a bunch of outlaws.”
In many ways, it is a great idea: SA has a woefully low savings rate — partly because we have such staggeringly high levels of unemployment (43.2% at last count), partly because the cost of living is becoming extraordinarily high, and partly because we are a consumerist society. The deeper question is: how assured are we about the judicious implementation of such a plan? With its usual tin ear, the department of social development has published this plan without any apparent awareness of just how fragile trust in the state is right now. Anyway, this topic could form the basis for an entirely separate commentary.
The dog days of summer in the Northern Hemisphere are often characterised by illiquidity in financial markets across the globe. Trading volumes drop when people go on vacation; and the season is also subject to bouts of panic when the holiday calm is shattered by the inevitable surprise news event. This August’s menu of woe includes the spread of the delta variant globally and the dash of fear that the pandemic recovery – which we seemed to be on the verge of – is actually dipping into a long-drawn-out plateau. This noxious combination is keeping a firm bid under an already over-bought US dollar.
Meanwhile, the Federal Open Markets Committee is making noises that its monthly $120-billion bond buying program might be dialled down in the next few months. The perpetual worry among investors around the world is that stimulus may be withdrawn before the US economy (on which everyone is somehow dependent) is fully self-sustaining. It’s no surprise they think it best to head for the safety of the greenback, where they can sit out the imagined storm.
What others say
Money Web – Mandatory social security plan proposes another tax on the middle class
Adds Johan Gouws, head of advice at Sasfin Wealth: “This green paper comes as a bit of surprise to many of us, coming as it does on top of the National Health Insurance proposals, and the exit tax for emigrants, and the discussion around prescribed assets.
Business Live – Pieter Hundersmarck: China’s tech crackdown offers chance for risk-savvy investors
Regulation was long overdue, and indeed the swiftness of the decision-making in China is likely to be envied by Western governments. However, the execution was poor. Capital is notoriously skittish, and China’s foreign policy over the last decade has left capital providers nervous. Opaque communication has made the government look haphazard and potentially spiteful. No financial market on the planet operates well with haphazard or uncertain regulation. China should know this.
Bloomberg – What will the Taliban do with a $22 billion economy?
Right now, new donors or investors are not inclined to trust the Taliban anyway. The Biden administration has frozen $9.5 billion in the Afghan central bank’s assets and halted shipments of cash to the country; European governments have suspended development aid; and the International Monetary Fund has cut off access to Afghanistan’s special drawing rights.
Coin Telegraph – Institutions appear bullish on crypto despite record Bitcoin outflows
International investment banks and financial services companies like Morgan Stanley, BlackRock, Goldman Sachs and JP Morgan have all set up Bitcoin-related services and funds over the last few months. After reaching a peak of $40 billion in April, the Grayscale Bitcoin Trust, one of the largest institutional investors in the space, reported that its total assets under management fell to $20 billion in July before climbing back to nearly $41 billion amid the recent rally.
What we think
Last week we stated “Our domestic data is unlikely to surprise many this week as one would expect the market to have priced in the turmoil caused by the civil unrest already. Of course, this does not account for any surprises – as they say, the devil is in the details.”
With the US Fed Jackson Hole Symposium being held remotely because of virus worries, the probability remains high that Fed Chair, Jerome Powell, pushes any policy decisions out to the next FOMC meeting on 23 September. Either way, there is simply too big a time lag between any prospective taper of quantitative easing and the Fed funds rate actually ever being raised high enough to justify further flight from other currencies that lag behind in the stimulus reduction process. Expect the dollar to stay bid into the Jackson Hole event risk.
The local weekly data calendar sees the Leading Business Cycle Indicator reading, unemployment rate, mining production figures, all of which should be over-shadowed by the Jackson Hole event.
Driving the EM underperformance lately, has largely been events in China – be it local authorities cracking down on tech companies, debt problems amongst some of its biggest name corporates or continued deleveraging in the likes of the property sector. But with commodity prices now falling sharply, will the PBOC now let the Renminbi fall too?
This week we will also be watching to see whether USD/CNH pushes through the recent high of 6.53. Most vulnerable to such a move will be the commodity linked countries like South Africa and most of the developing economies. We think the ZAR looks especially vulnerable since its large trade surpluses will now come into question.
Our range for the week: R14.95 –R15.50.
Have a great week!