MyCURRENCY News | Week 37

A very brief commentary following last week’s range-bound trade which saw the Rand consolidate its impressive recent gains. The most significant data release was South Africa’s Q2 GDP coming in at 1.2% higher than Q1, stronger than what economists were expecting. The year-on-year figure of +19.3% was significant only in showing the severe of impact of the country’s first hard lockdown.

Additionally clouding the figure, was the recent reweighting and rebasing to which we alluded to last week. Elsewhere, Manufacturing Production continued to disappoint, the July figure dropping 4.1% year-on-year and 8% from June, a concerning trend indeed.

It seems as though the most popular narrative at the moment is around in the current commodity bull market and the positive impact this has on the country’s – and currency’s – fortunes. To recap the gains since 20 August:

ZAR vs USD: 8.6%

ZAR vs EUR: 7.6%

ZAR vs GBP: 7.0%

Of course, one can easily point out a flaw in the above summary, in that it only paints a partial picture of how the Rand has been trading. Indeed, whenever one chooses a timeframe over which to measure any currency’s (or other asset’s) returns, the tendency of choosing a starting point to suit one’s narrative is strong. By simply going further back a month or two it is easy to find a starting date which could rather show that this rally has simply erased the losses since June.

As such, this week we’d like to simply zoom out somewhat further than usual in order to set out our current view. Since the beginning of the end for Zuma, which arguably started with the shenanigans of late 2015, the Rand spent the most of its time trading between 13.20 – 15.70 against the USD.

The major periods during which this range was significantly breached for a reasonable period of time, were:

• – Over-exuberance at the arrival of Cyril during which time we traded as low at 11.60, and
• – The first 8 months of the current pandemic during which we reached as high as 19.00 and spent most of the time above 16.00.

Keeping this train of thought very basic (seldom does over-thinking the Rand do anyone much good) and assuming that the 13.20 – 15.70 range is a more accurate reflection of a fair-value range for the Rand, then the mid-point puts us at 14.45. With no further economic surprises or political faux pas, we would be comfortable with continued trade around that level, meaning a 2% weakening of the currency.

However, this brings us to the USD and the fact that at some point in the coming 6 months a sustained rally in the green-back is more likely than not. If and when that does happen a move in the USD index from 92.8 currently to 95 would be the immediate short-term target and that alone could see the Rand back at 14.80. Beyond this, as the US economy continues to recover, and without needing to be fundamentally bearish on South Africa and the Rand, the prospect of the Rand settling into the 15.00 – 16.00 range over the next 12 months becomes our base case.

Last week we wrote that the fact “…that the USD has not come under more selling pressure since Friday’s weak labour market data may leave investors wary that its retreat has run its course for now, especially as the Dollar Index has shown tentative signs of a turnaround so far this week. The ZAR potentially stands to lose the most if the USD turns, having gained the most in the EM currency basket over the past two weeks.”

With the above in mind, we spent most of last week scratching our heads and thinking if there’s something we’re missing regarding the current Rand strength. Despite the USD index being 0.80% stronger than immediately prior to the weak NFP release on 3 September, the Rand is up 0.80% vs the USD, 1% vs the GBP and 1.5% vs EUR. In other words, the recent relationship between the direction of the USD, risk appetite and ZAR performance has become somewhat disconnected.

The extent of the recovery off the August highs, which we outlined at the start of this commentary, continues to take us by surprise and we acknowledge that the market may carry on proving us wrong in the short-term. We continually see how market momentum can sustain rallies and sell-offs and lead to overshoot in either direction.

However, we simply don’t think that under the ongoing global uncertainty around economic recoveries, monetary policies and future vaccination / Covid developments, further Rand strengthened can be justified.

Our range for the week ahead is 14.10 – 14.40.