November 30, 2018
Duel at the G20
What we know
Without downplaying the importance of the ongoing trade war between the US and China, it’s certainly getting tiresome having to listen to market commentators attributing daily moves to whatever Trump (or his counterpart) has or hasn’t said in this regard. We rather view the overall situation as causing broad-based uncertainty in global markets and hence as a signal to not ignore the possibility of potential sharp moves (one way or the other) in the coming weeks and months. We’d rather categorise much of what we read about on a daily basis as market noise or, as we like to call it, “fitting a story to a move”.
Nevertheless, the theme this week has been the possible outcome of discussions between Trump and his Chinese counterpart, Xi Jinping, at the G20 summit in Argentina this weekend. We’re of the view that market has been pricing in a close-to-worst-case outcome to the trade war and that on balance the odds are slightly in favour of comments that the market would view as favourable.
The other major driver was the Wednesday evening comments by Fed Chairman Jerome Powell which hinted that the rate hike cycle in the US may be somewhat closer than what many market participants thought. This in turn saw the USD lose 1% against a basket of its trading partners, as well as a rally in emerging markets. The rand is now comfortably the best performing EM currency over 1-year, while Thursday’s lows were new best levels since August.
The third major (and long drawn-out) risk factor remains Brexit, with yet another week bringing many headlines yet little substance – all eyes are now firmly on the December 11 UK Parliamentary vote on the draft agreement. It will be fascinating to see the outcome as well as the market’s reaction.
Locally, market moving news was relatively limited, and the noteworthy data releases were disappointing. All of Business & Consumer confidence, PPI and Balance of Trade were worse than their previous releases as well as analyst consensus.
What others say
26 November 2018
CNBC – Trade Tensions Hoist Dollar To Near 2-Week Highs; Pound Struggles
“The US dollar rose to its highest level in almost two weeks against its major rivals on Tuesday, after President Donald Trump said that he would push ahead with tariffs on Chinese goods, fueling concern about world trade tensions… Broader optimism towards the greenback was reflected in positioning data for the week ending Nov. 26, which shows hedge funds added a net $1.28 billion long positions in the dollar.”
Pound Sterling Live – South African Rand To Outperform In 2019: Morgan Stanley
“Morgan Stanley say November budget surprised investors on the downside, given weak growth and sticky expenditure but it importantly “also set a low bar for February’s budget, where the government could find new measures to reduce the deficit,” says Redeker…Morgan Stanley are forecasting USD/ZAR at 13.80 at the start of 2019 and 13.00 by the end of 2019.”
27 November 2018
New York Times – Trump Could Seek A China Trade Truce At G-20, Despite Tough Talk
“President Trump is projecting a steely facade as he prepares for a critical meeting on trade this weekend with President Xi Jinping of China. But behind his tough talk and threats of higher tariffs is a creeping anxiety about the costs of a prolonged trade war on the financial markets and the broader economy… But Mr. Trump has signalled a new willingness to make a deal with Mr. Xi, a leader he has treated solicitously and will meet over dinner on Saturday in Buenos Aires, after a summit meeting of leaders of the Group of 20 industrialized nations.”
The Guardian – Theresa May Rejects Donald Trump’s Criticism Of Brexit Deal
“The US president said: “I think we have to take a look at, seriously, whether or not the UK is allowed to trade. Because, you know, right now, if you look at the deal, they may not be able to trade with us … I don’t think that the prime minister meant that. And hopefully she’ll be able to do something about that.”
“May’s spokesman repeatedly insisted on Tuesday that it was clear “in black and white” in the political declaration forming part of the Brexit deal that the UK will have the power to make new trade agreements.”
28 November 2018
MoneyWeb – South African Central Bank Expects Volatile Rand In 2019
“Mminele said the bank expected the rand to average 14.50 against the dollar but trade would be volatile, forcing the monetary policy committee to remain flexible in its responses. “We will continue to allow the exchange rate to absorb the initial shocks, and focus our policy actions on addressing second-round price effects,” Mminele said at a foreign exchange conference after the bank raised lending rates last week.”
29 November 2018
Reuters – South Africa’s Rand Firmer As Dovish Fed Boosts Risk Appetite
“South Africa’s rand firmed in early trade on Thursday, as the dollar faltered after the U.S. Federal Reserve Chairman suggested they may be nearing an end of their three-year rate tightening cycle, boosting interest in riskier assets.”
30 November 2018
Reuters – South Africa’s Rand Steady, Eyes On Trump-Xi Meeting
“South Africa’s rand steadied against the dollar in early trade on Friday, with investors cautious ahead of a crucial weekend meeting between the Chinese and U.S. presidents that could determine the course of a heated trade war over the next year.”
What we think
Last week we wrote that “…we are now of the view that consolidation between 13.70 – 13.90 would be healthy price action. It is important to note that this is a fairly narrow range and as such, does mean that breaks either way would see new targets open up in either direction. We do still favour a possible test of 13.60, however, while further weakness may be capped at 14.10.”
It’s always rewarding to look back at our previous week’s and have it so well validated. The 13.70 level did prove relatively stubborn and sure enough, once that broke, 13.60 proved a bridge too far. Looking to the week ahead, we’re widening our range slightly to 13.60 –14.00. Although we remain bullish that the ZAR could remain in the 13.00’s for the foreseeable future, we may be seeing recent momentum start to slow somewhat, as well as some complacency starting to creep in to the ZAR outlook, especially when one considers how poor recent economic data has seemingly been ignored. While still favouring a retest of 13.60, touching mid-week’s highs of just under 14.00 cannot be ruled out.
Have a great weekend!