Weekly forex update 22/12/17

What we know

Cyril Ramaphosa is the new President of the ANC, albeit with a compromised Executive and NEC. Land expropriation (without compensation) and nationalising the SARB are two immediate policy focal points emanating out of the conference – crucial outcomes that investors will keep critical eye on. The ZAR has found a new trading range between 12.50 – 12.80, pairing most of the mid-week gains following the  overnight policy news. Aside from the conference outcomes, there was very little else driving the currency locally.

Looking abroad – Initial jobless claims came in higher than expected on Thursday, putting the dollar index under pressure in early trade. Final GDP was recorded at a healthy 3.2%, albeit slightly below expectations. On the policy front, Trump’s landmark Tax Reform Bill was passed by US lawmakers during the week. The charges are expected to benefit big business and GDP growth on one hand, while on the other, it’s likely to further burden the fiscal budget deficit, bumping its head on the $20 trillion debt ceiling. While a Government shutdown appears unlikely, the macro outlook for the US is finely balanced.

What others are saying

18 Dec 2017
Investec Morning Report

“In terms of intra-day strategy, there is still some asymmetry in the market brought about by market positioning… but still there is more potential for ZAR strength than there is for ZAR weakness.  In other words, a Ramaphosa win has the potential to generate a stronger market reaction than a Dlamini Zuma win given how much risk is already priced into SA markets.  Trading off a long USD base given the way that the tide appears to have shifted does not make a lot of sense at the moment and ahead of the outcome most bank traders will prefer a neutral position.  Thereafter, direction will be taken from a combination of the outcome of president and the makeup of the NEC.”

USD-ZAR at the time of writing: 13.0800

19 Dec 2017
REUTERS | Market News – Investors fear South African market euphoria is overdone

Political risk consultancy Eurasia reckons, in fact, that with elections looming, the ANC may lurch further to the left, and will not therefore “provide sufficient grounds to reverse ratings downgrades before mid-2018.”

“If you look at local (bond) markets, I’d say the market relief was probably not justified by fundamentals. The structural weakness is very entrenched and won’t go away easily,” said Anders Faergemann, senior portfolio manager at PineBridge Investments.

RMB Global Markets Daily Report: ‘Fade the rally’

“Opinions differ on whether President Zuma will remain president of the country but there seems to be a bias in thinking he will step down in the next few months, thus avoiding the problem of two centres of power. We suspect that this issue will get a lot of attention in the next few weeks.”

20 Dec 2017
Bloomberg Politics
Read article here

According to the report, delegates at the African National Congress’s elective conference in Johannesburg decided that the government should own 100 percent of the Reserve Bank, Enoch Godongwana, the head of the party’s economic transformation committee, told reporters in Johannesburg on Wednesday. “We said we would buy it when we have money without benefiting the speculators,” he said.

CNBC Markets
Read article here

“A British investor who some like to call Britain’s answer to Warren Buffett has given a stark warning on both stocks and bonds.”

“Jim Mellon of the Burnbrae Group says U.S. equities are close to a top, there are ominous signs for the bond market, and profits at large tech companies will likely sag in the face of new regulation.
“We are pretty close to a top. I have been in this market for 30, 40 years and I would say it is extremely fully-valued by most measures,” he told CNBC Wednesday.

Market Watch | Opinion

The global Economy looks steadier, but uncertainty remains, from Trump to Brexi (Read)

“On the other side of the world, Chinese President Xi Jinping’s Belt and Road Initiative is changing Eurasia’s economic geography, putting China at the center, and providing an important stimulus for region-wide growth.

But China must confront many challenges as it undergoes a complicated transition from export-led growth to growth driven by domestic demand, from a manufacturing economy to a service-based economy, and from a rural to an urban society. The population is aging rapidly. Economic growth has slowed markedly. Inequality is by some accounts almost as severe as in the U.S. And environmental degradation poses a growing threat to human health and welfare.”

Market Watch | Opinion –  Short Report

“After this week’s results‚ however‚ it’s clear that the ANC (at least in its current condition) doesn’t need a stern taskmaster. Unless Ramaphosa is about to reveal supernatural powers of courage‚ determination and persuasiveness‚ what the ANC needs right now is a priest‚ an undertaker and a headstone.”

21 Dec 2017

Bloomberg Politics – Read article here

 

According to the article, “Cyril Ramaphosa pledged a crackdown on corruption in his first speech as the leader of South Africa’s ruling African National Congress.”

“Corruption has to come to a stop and it must happen with immediate effect,” Ramaphosa said in the closing address to the ANC’s national elective conference in the early hours of Thursday morning. “We must confront the reality that critical institutions of our state have been targeted by individuals and families.”

What we think

With its fair share of tactical manoeuvring and controversy, the ANC conference seemed a fitting event to mark the end of another tumultuous year in South Africa. At this juncture, Ramaphosa’s new executive is certainly compromised, however he gets to choose the next Head of the NPA, a major trump card dealt to him by the High Court. The ANC’s failure to  “Self Correct” could be forced through the Judiciary, moreover we need the wheels of justice to turn swiftly and ruthlessly. The outlook for the currency now hinges on Moody’s postponed rating decision due out in February after Malusi Gigupta delivers his budget. As things stand its hard to see how we avoid the downgrade, moreover ANC policy commentary on Land Reform and the SARB certainly won’t help our cause. In meantime, we expect the ZAR to trade in the 12.50 – 13.0 range until we get fresh news on all  budget, the state economy, ratings expectations and of course, our dear politicians  – Now it’s time to reflect and recharge. Happy holidays.

---

Have a great weekend!