Weekly forex update 17/11/17 – Things are (not) as they seem

What we know

Things are (not) as they seem

As the world focuses on the (non) coup in Zimbabwe, South Africans took a breather from our own (non) political crisis. Mckinsey & Co will be paying back the estimated R1bn it (never) stole from Eskom following its (non) admission to (no) wrong-doing.  As yet another week goes by without any action from local law enforcement, the mountain of (non) evidence continues to pile up as multiple Parliamentary Committees dredge up damning testimonies against the usual (non) suspects.  Amidst the denials the truth is being laid bare for the world to see.  Let Zimbabwe serve as a reminder, that even when internal justice fails the wrath of global investment capital will serve economic justice on the people of South Africa for the sins of their leaders and corporate accomplices.  24 November lands next Friday and to the ratings agencies, things are exactly as they seem.

Having started the week as high as 14.57 against the USD, the ZAR finally had some respite, strengthening 2.3% to 14.23 at the time of writing – our thoughts on this below.

What others are saying

Monday
Investec Morning Report – 13 November 2017

“The last kicks of a dying horse.  That is how some are describing Zuma’s latest efforts to regain some form of legitimacy with low income households not able to send their children to university.”

“It is therefore understandable, given how much more we now understand, that the ZAR remains on the defensive.  It is a fear driven trade rather than anything fundamental in terms of the operation of the economy, but is yielding pressure nonetheless.  It would be very hard to argue in favour of selling USDs at the moment, unless the political environment takes a turn for the better through the weeks ahead.  At the moment, even more in the way of bad news is being priced in.  The path to December is increasingly looking like a dangerous one for the ZAR.”

Treasury rocked as budget chief quits

“Cape Town – National Treasury has been rocked by the resignation of its long-time budget head, Michael Sachs.” Read article

“No free higher education, cost-sharing more feasible” – Heher Report

Tuesday
Investec Morning Report – 14 November 2017 

“It is unfortunate that we still have another five weeks of this speculation and uncertainty to live through and as such the bearish sentiment is likely to persist.  That being said, we continue to point to the overwhelming market positioning that should be a source of concern to those persisting with long USD trades.  The risk is that a Ramaphosa win in December triggers a very strong ZAR rally as those positioned for more bad news capitulate.  For now, trading off a long USD base holds merit, but the asymmetric risks of this stance are rising with each passing day.”

Fin 24
A Fin24 article declares that Mineral Resources Minister Zwane Mosebenzi said he will support the nuclear deal.

“Some people are saying this is an elephant in the room, but there is no elephant. There are two countries discussing, like anybody, and if they agree, we will push it.” Said Zwane.  Read Article here.

Wednesday
According to a Fin24 article, RMB’s currency Economist John Cairns shared that there may be a repeat of the 2001 crisis where the currency depreciated as much as 26%. “Remember that the great blowout of 2001 was at least partly because of — or at least blamed on — Zimbabwe,” he said.

Thursday
RMB Global Market Research and Sales Report

“We continue to see the situation in Zimbabwe as a “very mild rand negative”. We would revise this to a “meaningful negative” if violence flares and to a “cautiously optimistic positive” if new credible elections are announced.”

Investec Morning Report – 16 November 2017

Commenting on the recent dramatic events in Zimbabwe…

“Although it would appear at face value, that developments in Zimbabwe have very little influence on SA, it is undoubtedly true that SA would fare far better with a stable and improving Zimbabwe than what has been the case for the past decade. A Zimbabwean economy that begins to grow in a sustained manner, which is more stable and attracts former emigrants back to their country would go a long way to lifting the burden that SA has been forced to carry.”

What we think

It feels like a long time since the ZAR spent a week on the front foot, yet here we are with the ZAR 1.0% stronger on the week against the USD and GBP, and well off the highs seen on Monday afternoon (2.3% and 1.6% respectively).

While our bearish outlook remains in the near-term, it did seem as though the sell-off had run out of puff for the time being.  Nevertheless, while a relief rally may have been due, we are still a bit surprised that we’ve broken support at 14.28 – the final move towards 14.22 (at the time of writing) was helped by sluggish US employment data.

As such we continue to call for ZAR weakness over the coming weeks – in the absence of some unexpected feel-good headlines, we don’t see how the looming ratings agencies’ decisions and government shenanigans won’t keep market participants very skittish.  Our range for between now and the end of the year is currently 14.00 – 14.60, with our belief being that the latter remains likely.

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Have a great weekend!