25 May 2018

What we know

 

This week opened with the ZAR under pressure, continuing last week’s sell-off due to global trade war risks, concerns about further spill-offs relating to the Iran nuclear deal and emerging market sentiment. In contrast to last week’s strengthening, we suspected the sell-off was overdone.  Indeed, within a short while we saw a pull back and by Tuesday morning we were trading below the R12.70 to the USD, back within our short-term trading range of 12.30 -12.70.

Similar to last week, there weren’t any major market-moving data releases.  South Africa’s April inflation rate came out at 4.5%, the highest since December 2017 but below market expectation of 4.7%, while the MPC on Thursday kept local interest rates unchanged, as expected.  Similarly the Fed also left rates unchanged on Wednesday night, with few surprises in the official statement.  Consensus points towards a June hike; however, thereafter opinion is far more divided as to whether only one or two further increases will follow by year-end.  The USD reaction was fairly muted, with the green-back largely holding on to recent gains.

Concerns around Italy’s new leadership – as they seek to reduce debt levels and tackle immigration concerns – and the likelihood of renewed concerns around the stability of the European Union, weighed on the Euro.  Indeed, Wednesday saw the common currency trade at its lowest levels versus the USD since November.

Meanwhile, the Turkish Lira continued to be in the limelight as one of the main drivers for emerging market currencies’ declines. On Wednesday night Turkey’s central bank raised one of its key lending rates, which caused the Lira’s sharp rally and in turn the emerging market improvement. This has so far led the ZAR rallying to around the 12.40 level at the time of writing

 

What others say

 

21 May 2018

Moneyweb – The Zuma disaster: What took you so long, Trevor?

“Economist Magnus Heystek says that buying into the ‘Ramaphoria’ effect on the country is premature – particularly when so many of the Zuma-era policies that have caused so much economic turmoil still stand. In particular, the land issue which is now coming to the fore, is a key concern where a loss of investment is already being felt.”

“I simply don’t buy that narrative. I would need significantly more information backed up by real and quantifiable data to come out and say: yes, things are changing for the better.”

Nedbank – SA FX: Headache for The Rand: Stronger US Dollar 

“Our 1H18 and 2H18 forecasts for the rand are R12.45 and R13.00 respectively, which is more bearish than the Bloomberg consensus view (i.e. R12.22 for 1H18 and R12.09 for 2H18)… The reason for our ‘out-of-line’ forecast for the rand is due to our long-held view (i.e. since the start of 2018) that the US dollar would strengthen amid a number of global liquidity tailwinds that are losing momentum… Our view is now materialising, but we must admit that we are surprised by the speed at which it is taking place.” “We expect this trend to continue as the year progresses. Our target level on the US dollar index is 95 points, which is equivalent to €1.15/$ – hence our bearish forecast for the rand… Short-term, we recommend keeping an eye on support at R12.23 and resistance at R12.93.”

22 May 2018

Bloomberg – Emerging Market Stress Just Begun as Record Debt Wall Looms

“We look to be in for a pretty rough patch near term… The sharper the rise in the dollar and rates, the greater the near-term contagion risk. Rising U.S. rates will have a knock-on effect even in local debt markets, ” says Sonja Gibbs, senior director for capital markets in Washington at the IIF, an association of the world’s biggest banks.

Reuters – Oil falls on shock U.S. stock builds, OPEC supply worries

OPEC may decide to raise oil output as soon as June as Venezuelan output collapses, U.S. sanctions against Iran loom, and after Washington raised concerns that the oil rally was going too far, OPEC and oil industry sources familiar with the discussions told Reuters.

“It does seem like any move above $80 attracts selling interest right now and that could potentially lead us to a period of consolidation, where I think $77.50 or even $75 might be in focus,” Saxo Bank senior manager Ole Hansen said

24 May 2018

Financial Times – Turkish lira rallies sharply after central bank lifts rates

Mehmet Simsek, the deputy prime minister responsible for the economy, tweeted: “The central bank governor and members of the monetary policy committee have my full backing in doing what’s necessary to stem the slide in lira and achieve price stability…  None of Turkey’s macroeconomic problems [are] insurmountable. We’ve fixed problems in the past, we can do it again,” he wrote. It’s “high time to restore monetary policy credibility and regain investor confidence.”

What we think

 

There is no about it: volatility is back with a vengeance! Having had a relatively steady start to the year, with global markets being the primary driver of the ZAR’s fortunes at present, volatility has spiked appreciably of late.  As an indication, most days this week have seen trading ranges of between 1.5% – 2.5%.

For the past few weeks we have called for a 12:30 – 12:70 range. Despite this range being partially broken on Monday, which took us by surprise, it was assuring to see that the move was short-lived and that the rate is back within our range.

While the same risks to the ZAR that we have mentioned in recent weeks remain, both globally and locally, we are encouraged by the relative resilience we have seen of late. Indeed, in the absence of another downturn in emerging market sentiment,we believe that the short-term bias could be for the momentum to continue, with a possible re-test of the 12.30 level.

 

---

Have a great weekend!