Market News 31 July 2020

What we know

We were surprised by how strongly the Rand started this week, as by Monday afternoon we were already trading back at 16.40 having moved above 16.80 last Friday. From there we saw a couple of days of consolidation in the 16.40 – 16.60 range, before Thursday brought with it some fireworks: having closed just above 16.50 on Wednesday, it was one-way traffic yesterday as we touched as high as 16.94 in the afternoon. The losses against other major currencies have been even greater, as explained below.

Giving dollars away

There really has been one particularly strong theme in financial markets this week, namely the USD which continues to come under immense pressure.

Since the start of July the green-back has lost 4.7%, 1.7% of which has come this week alone. The accepted reason for this weakness is of course the extent of the growing stimulus and glut of liquidity that the Fed is feeding into the US economy and markets. The medium to long-term inflationary impacts of these actions in turn erode the perceived value of the USD and, further, confidence in its reserve status.

The last point in particular has been reflected in the price action of the USD’s “rival” stores of value since 20 July: the perceived safe havens of Gold and the Swiss Franc have rallied 10% and 4% respectively, the EUR and GBP have also both gained 4% against the USD, while the young upstart, Bitcoin, has spiked 22% in dollar terms.

The Fed’s decision on Wednesday to keep rates unchanged, while making it clear that any rate hike is a LONG way off given the need to bolster the economy, only added to the current “short the dollar” mentality that has driven this weakness.

The below chart shows the 5-year performance of the USD against its major trading partners. We’re not predicting whether the current USD sell-off will continue in the short-term (prices don’t typically just keeping rising or falling in a straight line); however, the green bar shows the region that traders may target (about 2% below current levels) before turning bullish on the USD again. Conversely the red bar shows where any USD relief rally may see profit-taking appear again (co-incidentally about 2% higher than current levels).

 

More Rand weakness ahead?

Last week we pointed out that the ZAR looked as though it was breaking out of the recent strengthening trend (the orange channel below). While last Friday’s move proved to be a fake-out rather than a break-out, the price action over the past day or so has been more decisive. The initial target for further weakness is 17.07, whereafter we could see a move toward the 17.20 – 17.30 region.

 

What others say

27 July 2020

MoneyWeb – IMF approves $4.3bn loan for SA to address COVID-19 challenges

“The loan, which converts to just over R70 billion, comes after South Africa received similar COVID-19 facilities from the New Development Bank ($1 billion) and the African Development Bank ($288 million).”

28 July 2020

Business Maverick – Dollar’s diminishing safe-haven status is a benefit to emerging markets

“Concerns about the sustainability of a nascent US economic recovery appears to be undermining the value of the dollar after jobless claims rose last week in one of a number of signs suggesting cracks are appearing in the US economy as states pause or roll back the reopening of businesses.”

29 July 2020

BBC News – Coronavirus: What’s the evidence Europe is having a ‘second wave’?

“Some countries, such as South Korea and Singapore, have been better than others at flattening it from the start by stopping the virus spreading by using comprehensive testing and tracing regimes.”

30 July 2020

Bloomberg – Trump floats delaying the election, but lacks the authority

“President Donald Trump raised the notion of delaying the Nov. 3 election until after the coronavirus pandemic eases, something he cannot do without the consent of lawmakers who have already rejected the idea.”

31 July 2020

Reuters – The US election is getting ugly – and investors are getting nervous

“An election without a clear winner the following day would likely weigh on the benchmark S&P 500, which is up nearly 45% since its March lows and hovering near record highs. The S&P 500 fell 1.8% the morning after the disputed Nov. 7, 2000 election between Democrat Al Gore and Republican George W. Bush, and fell 5% by the end of the week, according to data from Capital Economics.”

 

What we think

 

Last week we wrote that we weren’t “…surprised that the best levels failed to hold… the downward channel in which we’ve traded since late June appears as though it may be broken, which in turn could signal the end of the recent rally. Combining this technical view with our fundamental outlook, means that we again favour a move to 16.90 and then beyond 17.00 in the near-term.”

It had been a number of weeks since we’d even touched the lower end of our forecast range of 16.90 – 17.30, so it was finally nice to be “back in the game” with our predictions yesterday as this trend was finally broken – we anticipate that this range should now be the area in which we see some short-term consolidation.

Earlier in this commentary we mentioned that the USD could quite conceivably see a 2% move one way or the other in the short-term. To put this in perspective, with all else remaining equal, such a move would see the ZAR either gain or lose 35c against the USD. From the current level at the time of writing of 16.96 that would imply a move to either 16.61 or 17.31. Anyone who has been reading this note recently will know which figure we feel is more likely (or at least makes more sense to us)!

Our range for the week ahead remains 16.90 – 17.30.

 

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Have a great weekend!