Weekly forex update – 20/10/17

What we know

Only when we get some clarity regarding SA’s political future are we likely to see a step-wise strengthening/weakening in the ZAR.  Hopefully such clarity will start to emerge in November (Mid-Term Budget Speech and S&P ratings) and December (ANC conference). Any other news flow, cabinet re-shuffles, hiring’s and firing’s simply causes more noise and volatility.

Taking a step back from SA’s political shenanigans, we want to shed light on off-shore developments that will influence the general trend of the ZAR over the medium to long term. The USD is poised for further strength as macro data continues to support the case for a rate hike. Weekly jobless claims printed to new multi-decadal lows together with the Philly Fed manufacturing index posting a sharp rise to June highs – the employment subcomponent at an all-time high. Importantly, The Senate successfully passed a budget resolution overnight, paving the way for the Republican tax reform agenda.  Much uncertainty remains over its eventual make-up; however, it’s safe to say, Wall Street will likely cheer the proposed corporate tax cuts which will inevitably favour the USD.

What others are saying

RMB Global Markets Research
Tuesday, 17.10.2017

The longer the rand can remain strong, the more the market will “reset” to these levels but it is too early to dismiss the risks of a reversal. We continue to think risks are for a USD/ZAR move into the 13.40s, although it seems clear that this would come via continued mild underperformance — if it was going to happen via a sudden correction then it would have happened yesterday.

RMB Global Markets Research
Wednesday, 18.10.2017

“We feel more comfortable with the rand at these levels and think the bias for weakness should ease — and the risks could even be switching the other way.” USD/ZAR at the time of writing: 13:44

Major Data Points (via Trading Economics)
19.10.2017

• China GDP Growth Eases to 6.8% in Q3

The Chinese economy advanced 6.8 percent year-on-year in the third quarter of 2017, following a 6.9 percent growth in the previous two periods and matching market consensus. It was the weakest pace of expansion since the fourth quarter of 2016, as fixed-asset investment rose the least in nearly 18 years while industrial output and retail sales increased further.

• South Africa September Inflation Rate Stronger than Expected

South Africa’s consumer price inflation rose to 5.1 percent year-on-year in September 2017 from 4.8 percent in the previous month. The reading came in above market expectations of 4.9 percent, mainly boosted by higher prices of housing, transport and miscellaneous goods and services.

18.10.2017

• US Jobless Claims Lowest Since 1973

Initial Jobless Claims in the United States decreased by 22 thousand to 222 thousand in the week ending October 14th. This is the lowest level for initial claims since March 31, 1973 as workers affected by hurricanes Harvey and Irma continued to return to their jobs.

What we think

Having seen the ZAR weaken 5.3% against the USD, before rallying 4.5%, and finally weakening again 3.5%  – ALL in the space of 4 weeks – we feel it’s most appropriate to simply re-iterate our view of last week:

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 news-flow 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.

Hopefully, following next Wednesday’s Medium Term budget release, we’ll have further clarity and insight to offer amidst all the noise.

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Have a great week everyone!