September 15, 2017
Weekly forex update – 15/09/17
What we know
After a strong start to the month, last Friday signalled the start of a ZAR sell-off, which continued through this week. The two main triggers, as we see it, have been the following:
Locally, political turmoil has increased short-term uncertainty. We saw the SARB fighting back against Public Protector Mkhwebane’s attack and while the Gupta-Zuma saga deepens, the ANC sows further divisions within the party. The Zuma-Gupta factions have lost many recent battles, however SA’s economy is losing the war. SAA’s R10bn bailout is imminent all the while SARS falls R13bn short in its 1Q17 revenue collection target. This doesn’t bode well for Minister Gigaba’s upcoming budget conundrum as Moody’s keep a watchful eye.
Fittingly the start of Spring (albeit for the Southern Hemisphere) has seen some encouraging signs that the global economy is potentially seeing the start of some inflationary pressures.
Tuesday saw higher than expected inflation numbers out of the UK, while on Thursday a similar uptick in inflation boosted the ailing USD. Critically, US inflation increased to 1.9% and together with falling Initial Jobless Claims, there’s a stronger case for potential rate hikes. Bear in mind that much of the recent USD weakness has been driven by continued dovishness on the part of Janet Yellen. A strong recovery in the USD hampers the outlook for the ZAR in the short to medium term.
What others have said
“We started the week with mixed influences. Risk appetite is high given Hurricane Irma’s changed path and the surprising lack of any belligerence from North Korea. In all, this is a neutral environment for the rand but given the underperformance and current account data, the bias, we think, is still for another test of 12.74/76 this week.”
(RMB Global Market Research and Sales – 11 September)
“The dollar’s gain is more complex. Partly it reflects the same forces above — i.e. a lessoning of dollar risks. The newswires would also have us believe that the ECB’s concerns over the strength of the euro, reflected in various speeches yesterday, also impacted — but strictly speaking, this would have implied euro weakness rather than dollar strength. The simple answer may once again be in positioning…”
(RMB Global Market Research and Sales – 12 September)
“South Africa is well balanced. Everything is in the range of moderate. There is no particular strength that stands out, and no particular weakness………That (the SARB’s) mandate is a precondition for macro-economic stability and a condition for growth.”
Zuzana Brixiova, vice-president and senior analyst, Moody’s
(Fin24 – 13, September)
“If we don’t fix our situation quite fast and we get downgraded, we will stay in junk for a while. This will mean, among other things, more job losses and the poor suffering the most.”
Jeremy Gardiner, Director Investec Asset Management
(Fin24 – 14 September)
“In continuation of the strategy put forward yesterday and in light of the event risk of the current account data being behind us and the political environment having improved, selling USD up ticks above 13.1500 this morning is favoured and considered prudent”
(Investec Morning Report – 15 September)
What we think
The past week has certainly given those watching forex markets much food for thought – as always, those focusing on the ZAR have had a bigger helping than most!
Having been outshone by the EUR of later, both the USD, and GBP in particular, have shown good gains – justified, we feel, given the extent of the underperformance and the positive signs seen in the inflation data. We acknowledge that the “base effect” dictates that at some point such negative trends will eventually turn around; however, given that the market has been fixated on looking for any signs of growth and the start of possible hiking cycles, the positive reaction is appropriate.
Given the above, the ZAR has of course suffered, together with its emerging market peers. Indeed the ZAR.GBP has lost a full 6% since last Friday.
The global macro picture is seldom the only factor driving the ZAR as we all know. After encouraging recent GDP data, we have seen disappointing Retail Sales and a larger than expected Current Account deficit this week. The bottom line is that economic data remains muted at best and political rumblings are seemingly gaining momentum again as we head towards December’s ANC Conference.
As things stand, and despite the recent sell-off, we remain of the opinion that on the balance of probability, current levels for the ZAR still represent a reasonable opportunity for externalising funds.