24 August 2018

What we know

 

Following the news headlines and volatility of the past two weeks, this week was thankfully quiet in terms of news and data releases, while holidays in the Middle-East region also contributed to uneventful trade in the Turkish Lira, bringing relative calm to emerging markets.

The focus has therefore largely returned to SA specific issues, which nowadays inevitably means talk around land reclamation. President Ramaphosa continues to make the right noises regarding how the process will ensure job creation, food security and economic upliftment. However, concerns will linger as long as there is lack of clarity around the detail as to how this will be achieved. This is of course exacerbated by Julius Malema showing no signs of slowing down with his aggressive, hate-filled rhetoric.

It was, however, a simple tweet from President Trump that had the most obvious impact on the ZAR. The hint that the US would perhaps become involved in this issue, saw the ZAR weaken 2% early on Thursday morning. The knee-jerk reaction was unsurprising, given how Trump has not held back when it comes to putting pressure on those countries with which the US is not seeing eye-to-eye. While confrontations with North Korea, Iran, Turkey, Russia and China are perhaps not surprising, even allies such as Canada and the EU have, over the course of his presidency, been singled out for scathing attacks from time to time.

The main data releases were the Fed’s MPC minutes and SA’s CPI inflation figures, both released on Wednesday. The outlook remains for further rate hikes in the US, which would continue to put pressure on the carry-trade; however, by this stage of the cycle, this should be largely priced in. The local CPI inflation figures were very slightly higher than expected, yet well within the SARB’s 3%-6% target range, with the result being that consensus remains the local rates won’t move from the current benchmark of 6.5% this year.

The net result is that as of now, the ZAR has gained 2.7% against the USD since Monday morning, with gains being eked every day barring Thursday. We believe this is explained in part by both the relative weakness of the USD over the past few days, as well as the ZAR recovering some of what we believe to be overdone losses last week. Indeed, having under performed other emerging market currencies quite significantly last week, the ZAR has been the best performer since Monday.

 

What others say

 

20 August 2018

Nedbank – The Outlook Remains Bearish

“As long as the US economic data surprises to the upside, the Fed may remain hawkish. Inflation remains elevated above the Fed’s 2% target, with markets expecting a hike in September, after the recent hike in June. Markets are also pricing in a further rate hike in December, but this will be dependent on growth and inflation in the interim. If economic data starts to surprise to the downside, then we could see the Fed temper its hawkishness.

Investec – Morning Report

“… Techs are showing the USD-ZAR to be overbought and for two days in succession, levels closer to the 15.00 handle have not been sustained. Although it may be premature to be calling a full-blown ZAR recovery just yet given the fluidity of the situation, a third failed attempt to break through 15.00 should it arise, may well see USD bulls capitulate. Equally, a break below 14.5000 this morning could also see the birth of a retreat initiated… USD-ZAR at the time of writing: 14.7100.”

21 August 2018

Business Live – Fatalism Over The Rand Is Misplaced

“We have seen in the past six months how quickly sentiment can turn, so it would be a mistake to be fatalistic when looking at the currency’s [Rand] prospects. An argument may well be made that traders were probably too optimistic in accumulating long positions on the currency earlier in the year, leaving it exposed once global sentiment turned against emerging markets more broadly. The danger for investors is that the pessimism will be similarly overdone and they’ll miss out on the upside.”

22 August 2018

CNBC – What To Expect From The Market In The Period Leading Up To A Fed Rate Hike

“Since the start of the current Fed rate hike cycle which began in December 2015, the month leading up to a rate hike tends to be a bullish stretch for the S&P 500 and the Dow… In that period, both indices average gains of more than 2%, trading positively 86% of the time.”

23 August 2018

Business Day – Fed Minutes Show Another US Rate Hike Is On The Cards, And Soon

“Fed officials also generally expected the economy would grow at a fast-enough rate to put upward pressure on inflation, which recently has come close to the central bank’s target… With interest rates rising, many policymakers said the Fed would soon have to stop describing monetary policy as giving a boost to the economy.”

IOL News – US-China Trade War Escalates With New Round Of Tit-For-Tat Tariffs

“If the trade war can end as soon as possible, I think the impact on the Chinese economy will be relatively small,” said independent economic commentator Hu Xingdou. “But if the trade war continues to escalate, from 50 billion to 200 billion to 500 billion, then the blow to China’s confidence will indeed be relatively large.”

24 August 2018

RMB Global Market Daily – Trade Talks Yield No Breakthrough

“The focus today [Friday] turns to Fed Chair Jay Powell’s speech at the Jackson Hole Central Banking Symposium. Market participants will be listening for clues on the Fed’s pace of future interest rate hikes… The Fed minutes for the August meeting released on Wednesday signaled that the central bank would continue with policy tightening. The minutes also showed that Fed officials viewed the faster-than-expected fading of fiscal stimulus and ongoing trade disputes as downside risk to the economic outlook.”

What we think

 

Last week we wrote that “we continue to hold the view favouring a ZAR recovery, as we feel that at these levels both the global jitters, as well as local concerns, should be largely priced in to the ZAR.  The risk to any forecasts lies in the fact that one cannot foresee whether the Turkish situation will lead to a more intense global crisis or be resolved in a far more muted manner.”

We continue to be encouraged by the price action seen in the ZAR this week.  The initial break through the 14.45 level was significant to us, as has been the consolidation between 14.15-14.45. While 14.15 and subsequently 14.22 have proven to be somewhat stubborn in allowing further gains, so too have retests of 14.45 been short-lived.

In our minds, the key levels to watch are now 14.15, where after a retest of 14.00 could be on the cards. To the downside, 14.45 would hopefully provide resistance to further weakness, where after 14.65 would be the next target.

The biggest caveat heading into next week could be whether or not the relative calm surrounding Turkey continues. A resumption of emerging market concerns would of course heighten risks of ZAR weakness in the near-term.

Our range for the week ahead is therefore 14.00 – 14.65.

 

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Have a great weekend!