June 26, 2020

Currency News

Market News 26 June 2020

Market News 26 June 2020

What we know


Not a particularly exciting week at all, with by the bulk of the trade happening in a fairly tight range between ZAR.USD 17.20 – 17.45. The big event of the week was always going to be Tito’s revised budget address on Wednesday and indeed trading was nicely divided either side of that taking place: a fairly defensive approach with clients somewhat nervous leading into the speech and therefore externalising funds, followed by a wait and see approach as markets digested the implications thereof and the ZAR saw an uptick in volatility.

Tito (and his Aloe Ferox)

We’re admittedly pretty big fans of Tito, so maybe our views reflect a bit of an inherent bias; however, we continue to take heart from his approach in trying to fix the problems he inherited, in particularly in his willingness to accept and recommend that politically sensitive and unpopular decisions will need to be made. Indeed, writing this brings to mind the famous Laurel and Hardy line: “Well, here’s another nice mess you’ve gotten me into” – surely this goes through Tito’s mind fairly regularly?

To summarise the key points, we’ve taken the below from a report by Tertia Jacobs, Economist at Investec Treasury:

Macro-economic forecast for 2020 in line with consensus: National Treasury forecasts GDP growth to contract by -7.2% in 2020 and to recover by 2.6% in 2021. CPI inflation has been revised down by one percentage point to 3.0% and 3.9% respectively, which will contribute to a moderation in the increase in the public sector wage bill.

Larger than expected shortfall in main revenue receipts: The expected shortfall in tax revenues was R304.1bn (including tax relief measures of R26bn), was well above our estimate of R259.0bnMain tax revenues are expected to decline to 22.6% of GDP, compared to the initial forecast of 25.8%.

Return of spending discipline: Expenditure could rise to 37.2% of GDP, compared to the February forecast of 32.5%. The Covid-19 related support measures have been lowered from R190bn to R145bn, leading to a net increase in spending of R36bn. The Land Bank was the only SOE that received additional support, with a liquidity injection of R3.0bn. We expect to see more direction in the October MTBPS.

Public sector wage bill: The implementation of a zero percent salary increase in F20/21 has shaved R37bn from the F20/21 public compensation bill, with the supplementary budget adding a further R0.7bn to base line.

Accelerating debt servicing costs: Interest payments will continue to accelerate and absorb a larger share of revenues, rising to an estimated 4.9% of GDP in F20/21 compared to the previous forecast of 4.2%.

Main budget deficit to widen to 14.6% of GDP: The consolidated budget deficit is forecast to widen to 15.7% of GDP, from 6.8% of GDP due to rundown of R40bn in cash balances to provide wage support through the various UIF assistance programmes. The main budget deficit is expected to increase to 14.6% of GDP from 6.8% and is above ICIB’s forecast of 13.6%.

Government debt: Is forecast to rise to 81.8% of GDP in F20/21 compared to the initial forecast of 65.6%. The active strategy factors in a primary deficit of 2.3% of GDP by F22/23 from 9.7% in the current fiscal year. This is important for stabilising the debt trajectory at around 86% of GDP by F22/23 (peaking at 87.% of GDP in F23/24).

Our main take away is that none of the above was particularly surprising and we’ve continually reiterated (since the overly optimistic market reaction to Cyril’s appointment a couple years ago) that, even before the damage caused by Covid-19, the country was facing a long, tough fight to implement restructuring plans to enable the required economic recovery. Even with the right people, structures and intentions in place (and we do give Cyril and Tito the benefit of the doubt), this may not be a battle that can be properly won – only time will tell.

As Tertia points out “the October 2020 Medium Term Budget Policy (MTBPS) will (again) come into sharp focus in the assessment of the government’s commitment to push through what are likely to be politically difficult decisions. These pertain to reforms to (and support for) state-owned enterprises (SOEs) and the public sector wage bill”.

As you were…

At the time of writing, we’re set to end the week pretty much where we started. As pointed out last week and illustrated below, since 11 June we have been range-bound between 17.00 – 17.50. While the budget update had the potential to cause a break in either direction, the lack of any major surprise means that did not happen and for now there is little direction in current trading. The key levels to watch for downside and upside breaks are therefore 17.15 and 17.65 respectively.


What others say

22 June 2020

Daily Maverick – UK’s Johnson to announce lockdown easing plans on Tuesday

“Johnson’s office said the prime minister would tell parliament on Tuesday which sectors would be allowed to reopen on July 4 under the government’s roadmap out of the lockdown. Detailed guidance would be provided to each sector so businesses were “Covid secure”.”

23 June 2020

Bloomberg – Traders unfazed by South Africa’s much-ado-about-nothing budget

“The economy is set to contract by as much as 16% this year, the budget deficit may widen to levels last seen more than a century ago, and government debt is heading off the chart. That’s old hat, said Peter Takaendesa, head of equities at Mergence Investment Managers in Cape Town.”

24 June 2020

Zero Hedge – FX traders brace for the “unthinkable”: An election with no clear winner

“According to yen implied volatility, there is a sharp jump in expected price moves around election day which is expected to persist into 2021. That is in contrast with the run-up to the 2016 election, when turmoil indicator in FX land reflected only a temporary minor uptick in volatility as investors broadly overlooked the likelihood of a Trump presidency – or any controversy surrounding the results – leaving them painfully exposed to those events.”

25 June 2020

Fin24 – Mboweni’s zero-based budget – the backstop before a spiralling debt crisis?

“The supplementary budget tabled by the minister on Wednesday – which modifies the February budget to make provision for Covid-19 relief measures – indicated that SA is teetering on the edge of sovereign debt crisis, with little room to manoeuvre.”

26 June 2020

BBC News – Coronavirus: Sweden says WHO made ‘total mistake’ by including it in warning

“Sweden’s response to the pandemic has been very different to other European countries. There has been no lockdown, with schools and cafes staying open, but large gatherings have been banned and most Swedes observe social distancing.”


What we think


Last week we wrote that “With the current momentum in play, we continue to favour a move towards 17.80. In saying that, should we see the ZAR strengthen, USD support lies at 17.10/17.25 respectively”.

Our view remains largely the same this week, albeit that the ZAR’s resistance to the initial weakness post Tito’s address is encouraging. The fact that there were no major nasty surprises also means that a potential risk event has now passed uneventfully. As such, we suggest that while we do still favour a move higher towards 17.80, our conviction is not as strong as in recent weeks.

Our range for the week ahead is therefore 17.10 – 17.65.


Have a great weekend!