September 25, 2020
Market News 25 September 2020
What we know
The Rand opened the week with a slump, eroding handsome gains from last week against most major currencies. We have since watched the souring mood in the market play out throughout the entire week, pushing the Rand towards August’s lows of 17.20 USDZAR down a whooping 111cents from Friday’s highs of 16.09 and August’s highs of 16.32.
This came as a surprise even to us, and from the looks of things, this looks more and more like a larger US dollar retracement and we believe we are getting to the point where dollar-shorts start to feel the squeeze.
Volatility is the new normal
Monday’s losses were inspired by a wobbling Chinese Yuan, which had its feathers ruffled by White House efforts to push two Chinese social media firms out of the U.S.
While higher commodity prices have seen our USD/ZAR fair value estimates for 3Q20 appreciate from 16.90 in June to 15.55 currently, we expect domestic risks to keep the rand trading above its fair value, around a midpoint of 17.00, in a range between 16.00 and 17.30. Dollar loan proceeds from the IMF and New Development Bank have also supported the rand by elevating FX funding costs, making shorting the rand more expensive. And domestic inflation remains rand positive — we expect CPI to average 2.7% over the remainder of 2020. Click here
Wednesday’s bond auction didn’t save the Rand nor did the chequered performance in global stock markets, with losses building alongside falls in the S&P 500 but also those of the Chinese Yuan, which suffered its steepest intraday decline for months. Yuan losses may finally have pulled the rug from underneath EUR/USD too, although the Rand tends to be influenced by both because each is a currency of one of South Africa’s largest export destinations.
The Euro has itself followed the Yuan since the European Central Bank (ECB) protested in early September about the threat that a strong single currency could pose to the inflation outlook and Eurozone economic recovery. Central banks, especially those of economies which earn their bread and butter from exports, rarely welcome currency strength but the ECB has grounds to be particularly averse to it after having missed its inflation target for years.
US-China trade war spoils it for the rest
Looking ahead, we expect swings in global risk appetite to remain the primary driver behind the directionality of USDZAR for now. But we also think that the risk to USDZAR has become slightly skewed towards the upside given the rand’s tendency to record sizable selloffs once a correction starts. We think that the selloff in the rand so far this week was amplified by the fact that USDZAR had fallen to multi-month lows (of 16.10) on Friday last week – i.e. shortly before the deterioration in global sentiment.
The Rand, Yuan, Euro and stock markets have all traded with strong positive correlations of late, and were rocked last Friday when the White House went ahead with earlier established plans to prise two social media companies from China’s hands or otherwise push them out of the country.
Since then President Donald Trump has called for China to face United Nations scrutiny over its handling of the coronavirus, at a meeting in New York, and President Xi Jingping warned of a “clash of civilisations” while casting China as a defender of free trade, globalisation and multilateralism.
U.S.-China tensions are rising just weeks out from the November 03 election, a ballot that pollsters have credited the incumbent with almost no chance of winning. The outcome of the vote could be instructive of U.S.-China relations for years to come, not to mention the trajectory of a Yuan.
The market perception is that tensions will remain no matter if Trump is re-elected or evicted from the White House by opposition candidate Joe Biden. The latter has historically favoured a once-consensus “engagement policy,” which rarely resulted in new or enhanced tariffs on U.S. imports from China and never the ‘trade war’ that erupted between the two in early 2018, although Biden has changed his tune of late.
What others say
BusinessTech – Rand breaks R17 to the dollar as global Covid-19 fears mount
“A combination of events, including a potential of renewed lockdowns in the EU, the international banking saga and Donald Trump’s continuous pushing for China to face consequences for the Covid-19 outbreak, gave rise to renewed caution in markets”
AsiaTimes – US-China tensions rooted in deep, long-term shift
“In recent years, however, China has reset the parameters by closing the power gap with the United States. It is this reset of the international system that has catalysed changes in the domestic political thinking in both countries about the relationship.
China’s growth spurt evidently moved Xi to retire Deng’s foreign policy and shift to imposing China’s strategic agenda upon the region, even at the risk of alarming both the Americans and neighbouring countries.”
FT – Investors are getting pickier in emerging markets
“It is those countries that were in need of policy reform before the pandemic struck that are in the greatest difficulty now, Mr de Silva says. Three countries where sovereign debt is rising at a particularly alarming rate — Brazil, South Africa and India — are also the three emerging economies hardest hit by the pandemic.”
What we think
Last week we wrote that “ …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.”
We think that a break above 17.00 is on the cards, which could even pave the way for a re-test of the highs from the second half of August (of 17.53-17.54) if global conditions remain unsupportive for the rand. By contrast, if we are wrong and global risk appetite improves in a steady way then we would expect USDZAR to stabilize and then fall back to its recent lows (of 16.10). Our underlying thinking is that local developments outside the coming October budget review will remain a secondary consideration for markets for now.
Have a great weekend!