October 12, 2017
Weekly forex update – 12/10/17
What we know
The ZAR remains highly vulnerable to both internal and external risks. Volatility in the ZAR over the last week was largely externally driven – in particular, by the stronger USD which continues to rally off its lows. Favourable Macro data supports the case for the FED to raise rates and decrease money supply, both positive for the USD.
Internally, the ZAR remains vulnerable to key political events yet to play out. This week saw the release of the ANC’s provincial delegate numbers. The Ramaphosa/Dlamini Zuma factions are divided along provincial lines which gives more colour but less clarity as to who will emerge victorious in December. The consequences for the ZAR are binary depending on which faction emerges victorious. Of more imminent concern is the S&P’s rating decision due on November 24th.
Popular opinion credits Pravin Gordhan for keeping the wolves from the door. Since his departure our macro outlook has not improved and our politicians have done little to inspire confidence amongst investors. Against this backdrop, the medium-term Budget speech on 25 October will be of major interest.A downgrade in SA’s local debt issuance to junk status poses a significant risk to the ZAR.
What others are saying
Monday – 9 October 2017
Catalans call for talks as bid to leave Spain enters crunch week
A senior member of the Catalan administration called for dialogue with Spain, warning that all of Europe faces economic damage unless a resolution is found to his region’s standoff with the central government in Madrid.
Tuesday – 10 October 2017
Whilst the adjustment in the USD is potentially something to keep an eye on, the idiosyncratic factors driving ZAR have not changed to the degree needed to warrant this recent price action and so whilst we acknowledge the technical targets north of 14.0000/dlr, we would also caution investors of reading too much into this given that the factors that bolstered ZAR resilience remain largely intact, against the backdrop of a negative narrative that is widely known.
ANC Leadership Race: Zweli Mkhize is Zuma’s chosen one, Dlamini Zuma just a decoy, says Holomisa
“It’s not about a Zuma legacy, but that of the ANC legacy. And Ramaphosa and Mkhize are part of the top six,” said Holomisa. “The ANC is not what it used to be. If it begins to cleanse itself, it will destroy itself.”
Thursday 12 Oct 2017
Selling up ticks will likely be favoured heading into the weekend, with the only major event risk being the SCA’s judgement on the Zuma spy tapes saga tomorrow. The result will likely see pressure build on the NPA to reinstate charges against Zuma which in itself may turn out to be a ZAR positive and support the USD sellers.
A quicker and sharper-than-expected normalisation in interest rates in the US could trigger a reversal in capital flows to SA, adding that any sharp increase in global interest rates could also complicate debt dynamics for sub-Saharan as a whole.
What we think
While we have been calling the ZAR weaker for some time, the extent of the recent sell-off inevitably reduces our conviction of further weakness from these levels. We would expect ZAR rallies to occur from time to time – the challenge is in predicting whether these are simply gains within an otherwise weaker trend or more sustainable improvements.
Given some the poor economic landscape, Medium Term Budget Speech, Ratings Agencies’ review and December ANC conference, we simply cannot be bullish on the ZAR from a fundamental and newsflow perspective and, on balance of probabilities, foresee continued weakness for the rest of the year. From a trading and technical perspective we would still anticipate rallies from time-to-time, but would most likely view these as opportunities to sell the ZAR.
Under such circumstances we would always remind clients to not become anchored to possibly unreasonably strong ZAR targets on which they may have missed out earlier in the year, nor to get too greedy in the face of a strengthening ZAR.