January 19, 2018

Currency News

Weekly forex update 19/01/18

Weekly forex update 19/01/18

What we know

Welcome back everybody! 
We hope you’re all well-rested and ready to make 2018 a great year!

After much optimism since December, last week it seemed as though the much anticipated ending of Zuma’s presidency was not even an agenda item when the NEC met.  This sentiment was repeated again today by Ace Magashule, the ANC secretary-general.  Such comments, together with the fairly obvious delaying tactic employed by Zuma in commissioning the State Capture inquiry, means that hopes of a quick Zuma recall are fading fast.

Whereas there had been whispers that Ramaphosa may yet deliver the SoNA in three weeks, each day that passes makes it less likely.  Safe to say, Malusi Gigaba will delivery February’s Budget Speech under close scrutiny from Moody’s.  In keeping interest rates steady today, Lesetja Kganyago reiterated that the budget would be key in determining any further sovereign credit downgrades.  The feel-good factor post December’s conference seems to have taken this crucial consideration far from many people’s minds, with the ZAR continuing to trade at two-year highs.  Given the lack of evidence of concrete political and economic change, we believe this attitude may be overlay complacent.

Looking abroad we’ve recently seen poor inflation and job numbers out of the US continue to place the dollar under renewed pressure, tempering market expectations of the extent of further US rate hikes this year.

What others are saying

13 January 2018 

CFO South Africa | article | The World Bank says it anticipates growth in SA’s economy this year, and increased investmen

“The recovery is expected to solidify, as improving business sentiment supports a modest rise in investment. However, policy uncertainty is likely to remain and could slow needed structural reforms.”

15 January 2018
Eye Witness NewsExtract from an article by Rhodes university Politics Lecturer

“If Ramaphosa fails to hold the party together while simultaneously digging the country out of the hole that it’s in, a big question mark will continue to loom over the ANC’s elective fortunes in 2019.”

RMB Global Markets Daily

“We are hopeful that the SA economy can do better in 2018 given the good global environment and the better domestic political situation. Rate cuts to spur this growth are possible but this week is probably too early for the SARB to act: a lot of the political risks that the SARB worried about last year have eased and the rand has strengthened nicely, but caution is still due given the problems with the budget, the high risks of another rating downgrade that spurs WGBI outflows, and the surge in the oil price to US$70/bbl.”

16 January 2018
Investec Morning Report

“The probability of Zuma being forced out of office is rising all the time.  With respect to the SARB, an unchanged decision is priced in.  If the SARB were to surprise in the way of a cut, it would initially promote more portfolio inflows.  A test of the 12.2300 support levels is now looking like the next major test, but must surely be turning vulnerable.”

17 January 2018

Investec Viewpoint | ZAR Exposed To Fresh Bout Of Volatility Amid Deluge Of Political & Economic Events

“Local markets have taken a breather as the ANC conference event risk fades and ZAR volatility comes down notably relative to levels seen prior to this event. However, there is no room for complacency given a host of risk events to contend with in the first few weeks for 2018.”

Standard Chartered Bank SA

“Notwithstanding the positive retail sales surprise, growth is still weak, below potential. This is reason enough for the SARB to lend some near-term support to growth, and cut the repo rate in January,” A note by chief economist for Africa, referring to the retail sales numbers

Nedbank Group

“Today’s figures suggest that consumer spending will make a strong contribution to economic growth in the fourth quarter,” by economic analysts

What we think

The Rand continues to surprise us with its ongoing resilience and lack of volatility.  In part this reflects a relatively weak USD and somewhat of a global “risk-on” approach, as evidenced by the continued all-time highs being recorded by stock markets throughout the world.  In addition, we’ve seen a good rally in global commodity prices, while yesterday’s strong domestic retail sales figures (albeit boosted by Black Friday numbers) were also welcome.

Nevertheless, our concern remains that the ZAR feels somewhat “priced for perfection”, trading as it is around many economists’ fair value figure.  At the time of writing, at 12.18 vs the USD, this represents an almost 20% strengthening in just over 2 months.  With much changed required politically, and a proverbial mountain to climb economically, the threat of a downgrade in the next 6-8 weeks remains and we would urge caution against completely writing off this possibility and the potentially devastating consequences it would have for the ZAR and the country.

Have a great weekend!