March 23, 2018
The Fed in Focus, but no Moody Blues?
What we know
The feel-good factor from the early days of the Ramaphosa era continues as this past week saw the announcement that the corruption charges against Zuma would be reinstated and the suspension of Tom Moyane as the head of SARS became a certainty.
Although cause-and-effect is never completely clear, the market certainly appeared to react more to the latter news. Local data saw slower than expected inflation, a larger than expected current account deficit, as well as soft retail sales numbers. There was little market reaction to these figures; however, this does strengthen our view that, while still not the consensus outcome, the likelihood of a local rate cut next week is perhaps higher than what market commentators are suggesting.
Globally, the tit-for-tat “diplomacy” between the UK and Russia continued to simmer, while Brexit talks did show some signs of progress, as it was announced that the EU and UK had agreed on a 21-month Brexit transition deal, providing some comfort that a hard Brexit will be avoided.
The main focus, however, was always going to be on the Fed rate decision, with the announced 0.25% hike being in-line with consensus. At the same time the Fed increased its growth forecasts for this year and next, suggesting a more aggressive rate-hikes cycle may be on the cards.
This week, also saw the BoE leave rates unchanged, although the voting saw 2 in favour of a hike compared to none last month. The rhetoric pointed to a slow economic improvement and pay growth, increasing the likelihood of a hike in the coming months.
The market now awaits the outcome of tomorrow’s Moody’s review announcement, where no change is expected, albeit that this would leave SA on watch for a future downgrade.
What others are saying
19 March 2018
Nedbank SA FX: Moody’s should dominate this week despite rising external pressures
“… as pointed out last week, we would not be surprised to see the rand rally closer to R11.75 on the back of a ratings reprieve… Our six-month and 12-month target range for the USDZAR remains unchanged at R12.40 and R13.00 respectively. We remain largely in line with the Bloomberg consensus view on a six-month view, but we are more bearish on the rand on a 12-month view. Short-term, keep an eye on support at R11.70, and resistance at R12.00”
RMB Global Markets Daily Report: Focus on pace on future Fed hikes
“…a good budget and a renewed focus from government on fighting corruption combined with recovering growth, we do not expect Moody’s to downgrade the sovereign’s credit rating. Market consensus also thinks the same, thus a no downgrade is in the price.”
Moneyweb article UBS says South Africa’s Brazil moment is here
“…South Africa’s new leader and the corruption charges lodged against former president Jacob Zuma on Friday are setting the stage for a repeat of what happened in Brazil. The stock market there has more than doubled and the real has surged 18% since early January 2016, when investors began betting on a change in government.”
20 March 2018
ENCA News: Ramaphosa proposes single African currency: AU Summit
“We must rid ourselves of this colonial mentality that demands we rely on other people’s currency. Perhaps the day, the hour and the moment could have arrived for us to create a single African currency. Our focus should not be on our individual countries but the continent as a whole to unlock great opportunities and capabilities.”
Bloomberg politics: South Africa Awaits First Ratings Verdict of Ramaphosa Era
“We expect the ratings agency to wait to evaluate fiscal performance and policy actions at this time, with any fiscal slippage or populist measures potentially triggering a revisit and potential downgrade later in the year,” IHS Global Insight director Bryan Plamondon said by email.
21 March 2018
Eye Witness News | Malema: Indigenous Zimbabweans Should Continue to Own Land
“The struggle for economic emancipation is so that we realise human rights starts here in Southern Africa. It will move from Southern Africa to the north so that the whole of Africa is liberated.”
“I called President Putin of Russia to congratulate him on his election victory,” Trump tweeted. “The Fake News Media is crazed because they wanted me to excoriate him… They are wrong! Getting along with Russia (and others) is a good thing, not a bad thing,” he said, claiming Moscow “can help solve problems with North Korea, Syria, Ukraine, ISIS, Iran and even the coming Arms Race.”
22 March 2018
The Guardian: ABC and Guardian ‘dead to me’, says Dutton after South African visa criticism
“If people think I’ll cower or take a backwards step due to their fake news criticism they’ve got another thing coming.”…He said black farmers “don’t know how to run the farms productively and produce food – not because they’re not capable of being productive farmers – but because it tends to be the cronies of the political elite that take over the farms and they don’t know how to farm”.
Fin24: Room for Ramaphosa to make bold moves – economist
“It is possible that politicians with checkered history can rise above (it). But there is too much doubt around someone like Mabuza. If a leader emerges that is not trusted as much as Ramaphosa seems to be, then what are the chances that the checks and balances exist to stop them in their tracks? That is why I am worried about amending the Constitution now, even in the name of redress,” said Political analyst Daniel Silke.
What we think
Last week we suggested we’d be more comfortable with the ZAR trading at the higher end of its short-term trading range of 11.83 – 12.03 (and closer to 14.80 vs the EUR and 16.80 vs the GBP). By mid-day on Monday we had in fact broken through the top end of this range, trading as high as 12.10. While 12.03 did provide some support, the strength we’ve seen post the Fed hike makes it appear to have been a false break.
We did see the ZAR trade as low as 11.76 today; however, as at the time of writing, we’re once again back in the range. Notwithstanding tomorrow’s Moody’s decision, there is little to suggest a break out in either direction is imminent.
Looking slightly further out, it’s refreshing that it’s not just about local politics anymore (as has largely been the case for the past few years), but rather, we look to the progress of the US economy (as well as other developed countries) and the pace and extent of rate hikes, as a key driver to the ZAR’s fortunes over the coming months. Imminent hikes in the US, Europe and/or the UK, together with the possibility of a cut in rates locally (albeit that the market suggests the odds are still against this), do put the ZAR at risk of an unwind of the carry trade (the search for higher yielding currencies) and therefore make it more susceptible to a sell-off.
Have a great weekend!