March 19, 2018
Tensions Abroad And At Home
What we know
It was a fairly uneventful week, both in terms of price action as well as local news and economic releases. Last Friday’s employment and earnings data out of the US, as well as inflation numbers from earlier in the week, again suggested that inflationary pressures may be somewhat more muted than previously thought. This in turn dampens expectations around the timing and extent of rate hikes, reducing USD demand. We do however get the sense that the market almost feels a need to be bearish on the USD outlook at the moment and is tending to interpret most data releases with a negative bias. (As an example, higher than expected inflation data out of the US in February also resulted in the USD moving lower, with commentators interpreting it as being bad for growth). Locally, Manufacturing Production was in-line year-on-year but worse than expected month-on-month, while Business Confidence showed a better than expected improvement from the previous quarter.
The major global story this week focused on the UK-Russia tensions due to the recent poisoning of a former Russian spy in the UK. With Russia’s role in the Syrian conflict already a point of contention in global politics, we feel that further deterioration in relations among global superpowers can only be negative for global geo-political and economic prospects, which in turn could see an increase in investor risk-aversion.
Locally there was a new 4-letter on the front-pages: LAND. How the land expropriation discussion and implementation plays out, only time will tell. For now; however, there is plenty of passionate rhetoric being heard from politicians, business, agriculture, public and private owners, trade unions and global observers. It’s certainly a sensitive topic and, 13 months out from an election, one which runs a serious risk of political exploitation. Without inclusive discussions and debate in order to achieve a sensible framework, there is the potential for much nervousness and uncertainty, neither of which will be positive for the country’s fortunes.
What others are saying
12 March 2018
Bloomberg – Investors See South Africa Dodging a Downgrade by Moody’s: Chart
“Investors are betting South Africa will escape a fourth credit-rating downgrade in less than a year. The cost of insuring the country’s sovereign debt against default for five years using credit-default swaps fell to a five-year low Monday.”
Nedbank Research – SA FX: The currency and trade wars: An innocent bystander
“Our six-month and 12-month target range for the USDZAR remains unchanged at R12.40 and R13.00 respectively. We believe global factors will be the key driver of the currency this year… Short term, keep an eye on support at R11.70 and resistance at R12.06 (see our latest technical strategy note for a more detailed technical view on the currency).”
13 March 2018
Reuters – South Africa’s VAT rise won’t lead to higher interest rates – central bank
“There may be a few second-round effects, it may affect wage increases in the following years, so we expect a moderate, very small increase in the following year as a result of that… But it is something that we would not react to by raising rates and we would certainly try and look through it.” (Reporting by Karin Strohecker, editing by Marc Jones)
Eye Witness News – Rand edges firmer ahead of manufacturing data. report
“Manufacturing data for January due at 1100 GMT is expected to show the sector expanded 2.5% year on year… Inflation figures from the United States due later in the session could wobble the rand’s approach toward 11.50 mark seen as a target for bullish bets on the currency.”
14 March 2018
Business Tech – 4 big things that will affect the rand over the next few months: read
“The current view is that historical valuations suggest that the rand may be undervalued and may continue to strengthen as a result… However, as with all financial valuations, the timing and volatility is unknown,” investment analyst at PPS Investments cautioned.
Reuters – ECB to end bond buys only when inflation is on sustainable path: read
“Adjustments to our policy will remain predictable, and they will proceed at a measured pace that is most appropriate for inflation convergence to consolidate,” Draghi said.
Independent Online – SABC News: Watch president Ramaphosa answer questions in parliament
“We can take a leaf from how a number of other economies around the world have had to address their own economic woes. Countries such as Ireland, Netherlands, South Korea and Sweden have in the past successfully forged what one can call social compacts to drive economic growth.”
15 March 2018
RMB Global Markets Daily Research
“…With the NPA briefing parliament yesterday, and an announcement expected today around the corruption charges facing former President Zuma, we could be set for another wave of positive news with the state’s anti-graft drive making grounds… Overall, we still expect our market to be range-bound, with only Moody’s or the SARB being the events that could take us through the 8% area.”
Investec Morning Reports
“Nene confirmed that all 3 agencies had given the Feb budget a positive response, but he still acknowledged that it was unclear if Moody’s would downgrade or not.”“…We continue to note that their coming decision on Mar 23 still carries with it the non-negligible risk of a downgrade even though the market has turned much more optimistic since the political transition and budget. Moody’s could also leave things as is with a downgrade warning still in place, which would likely be interpreted as a negative outcome as well”
What we think
Last week we made reference to our short-term trading range of 11.83 – 12.03 and we reiterate that outlook again. Although we have made a number of attempts to break below 11.83, there does not appear to be much conviction at these levels. It is possible that the market has not entirely discounted the possibility of a downgrade next week, implying some element of a rally if we do avoid it; however, we are of the opinion that the likelihood of a downgrade is too remote to justify this.
Rather in considering the issues mentioned at the start of this piece – the UK-Russia feud, the prospect of US rate hikes and local land reclamation issues – we remain cautious in our approach and believe a level closer to 12.00 is more appropriate, with a similar adjustment to levels of 14.80 and 15.80 against the EUR and GBP respectively.
Have a great weekend!