August 07, 2023
MyCURRENCY News | Week 32 2023
What we know
Having watched the Rand’s recovery of late, there was always going to be a point at which the rally would be considered overdone. For some, this was around the R18.00/USD level, while others thought a break below R18.00/USD was always on the cards. While it wasn’t easy to achieve consensus even on our dealing desk, by the time we moved all the way to R17.42/USD, we were all struggling to justify the level and were expecting some kind of pullback towards R18.00/USD. What we didn’t anticipate was the largest weekly range since early May, pushing us all the way to R18.78/USD on Thursday, a drop of 7.2% in exactly one week. Indeed, in the past 10 days, we’ve now gone from a position of being unable to justify the strength of the Rand to feeling that the weakness is now somewhat overdone.
We all know that the Rand is prone to periods of over-exuberance, where it outperforms all currencies for a while (despite possibly remaining “undervalued” in the eyes of economists), followed by extreme pessimism, where it weakens significantly in a blink of an eye. While those are short to medium-term moves, they do unfortunately occur within a long-term depreciating trend.
While the main drivers of relative strength of late have been a weakening USD and risk-on sentiment, the weakness is typically caused by domestic headlines that damages global investor sentiment and negates any positive emerging market sentiment.
While we’re not suggesting that we have the definitive reason(s) for last week’s sell-off, we would put forward the following:
- The 9% rally over 3 weeks was overextended and a technical pull-back was in order;
- Poor manufacturing data out of China reduced global risk appetite;
- Malema starting the dangerous politicking game ahead of next year’s elections, reminds investors what the following months may bring, and
- Taxi strikes in the best functioning province in South Africa (the Western Cape) introduces yet another risk into the local political and economic landscape.
Holistically, the above factors could only serve to amplify the size of any Rand move weaker, although we do feel this may have been somewhat overdone. Friday’s soft Non Farm Payroll release from the US did provide some limited respite and we now wait to see how markets react to the Chinese and US inflation prints due out this week.
What others say
Reuters – China can no longer ‘extend and pretend’ on municipal debt
“Local governments are fundamental to China’s economy, with Beijing tasking provincial and city officials with meeting ambitious growth targets. But after years of over-investment in infrastructure, plummeting returns from land sales and soaring COVID costs, economists say debt-laden municipalities now represent a major risk to China’s economy.”
Bloomberg – Emerging-Market stocks are having a moment as growth bets return
“There are early signs of a rotation under way, with equity benchmarks beating local-currency bonds since the beginning of July. And traders are already starting to chase the rally, with Bank of America Corp. reporting that emerging-market equities have absorbed $4.1 billion in the week to Aug. 2, adding to inflows in the previous three weeks.”
Daily Maverick – Day 4: Brace for another day of Western Cape taxi strike after Santaco-government talks collapse
“Western Cape commuters have again been left in limbo as talks to halt the ongoing taxi strike could not deliver any good news on Sunday. This comes after a weekend of sporadic violence, including the murder of a law enforcement officer on Friday and the torching of more vehicles.”
What we think
Last week, we said “We don’t suddenly expect the ZAR to retest previous lows, that would be naïve – we would however like to see the USDZAR consolidate in a channel around the R18.00/USD level and take guidance from the next news events.”
It feels like Groundhog Day every time we need to write about the latest rapid sell-off in the Rand, as there are the inevitable questions as to why it’s happening and why the move is so big. The somewhat flippant answer is to be found in the fable – The Scorpion and the Frog – it’s just the Rand’s nature! We’re happy to say that many of our clients understand this and were very busy in July taking advantage of the Rand’s strength, lest it proved to be short-lived.
In terms of giving guidance to clients, it may be an oversimplification, however, we still feel it’s best to refer to the comfortable R18.00 – R18.50/USD range that held so well for 3 months starting at the beginning of February. The main trigger for us to weaken beyond that range into the R19.00’s was the headlines around our relationship with Russia and the negative impact this could have for our dealings with the West. With that concern (for now) seeming to ease, a move back into the range seems reasonable.
Unfortunately, as long as our local fundamentals remain so poor and the political climate so fraught (especially with election campaigns rapidly coming into focus) the risk of us trading above this range should remain greater than the chance of moving under R18.00/USD.
Our range for the week: R18.25/USD – R18.75/USD.
Have a great week ahead.