October 27, 2017

Currency News

Weekly forex update – 27/10/17

Weekly forex update – 27/10/17

What we know

The week began with all eyes on Minister Gigaba’s Mid-Term Budget speech.  While no one was anticipating good news, the question most where asking was to what extent had the ZAR priced in the horrible likely truth?  Making this call more complicated had been the past month’s volatility which saw ZAR sell-off sharply, recover and then weaken again in-line with a stronger Dollar basket.  As a result the first half of the week saw range-bound trade, with the odd pocket of strength despite our concern that the odds were firmly in favour of a sell-off.

Sure enough, the MTBS played out largely as expected and investors headed for the exit – the rest is history (read our piece All aboard! Next stop, the IMF). The (not so) mini budget has been digested and safe to say that buyers of SA debt aren’t exactly hungry for a trillion Rand worth of debt. Commentators have been unanimous in their predictions for November, SA needs to needs to be prepared for a downgrade………finally.

What others are saying

23 October 2017
Investec Morning Report

Concerns about the upcoming mini-budget and the apparent inability of the finance ministry to change the course of SA’s fiscal slide has keep sentiment towards SA weak.  Portfolio inflows into bonds have been poor and that has left the ZAR vulnerable.  Event risk post this budget will dissipate later this week, but in the run up to the announcement there is unlikely to be any significant improvement in the local unit that remains plagued with a plethora of bad news and sentiment linked to SOEs, state corruption, fiscal woes, ratings risks, poor growth and a vexed investment community that is looking for stability and some consistency.

24 October 2017
RMB – Global Market Research

Note that while we expect a bad budget, we do not think it would be so bad as to imply a further set of rating downgrades in the next round of reviews in November. We do think that further downgrades will come, but expect these only in June 2018 following the December ANC National Conference, the February budget and at the usual mid-year reviews rather than via out-of-cycle action.

26 October 2017
Investec – Morning Report

If this budget was aimed at shoring up business and household confidence, it failed.  It also failed in offering up a clear strategy on how SA’s government can start living within its means and/or promote any form of economic dynamism.  Foreigners will rethink their exposure to SA and whilst the positive carry will be enhanced on a tactical basis through the weeks ahead, SA citizens should brace for much more volatility, uncertainty and further economic degradation.  It is difficult to see investors selling USDs even from current levels and medium to longer term expectations on ZAR may need to be reassessed. 14.5000 targets looking quite possible in the short to medium term.

Bloomberg  – News

The Treasury expects the economy to expand 0.7% this year, down from 1.3% predicted in the February budget, and trimmed its growth forecasts for the next three years. Tax revenue for this fiscal year will fall R50.8 billion rand short of the initial forecast.

“Fiscal consolidation plans seem to have been largely abandoned,” Jeffrey Schultz, an economist at BNP Paribas in Johannesburg, said by phone. “We believe that not enough was done to instil confidence that fiscal consolidation remains front of mind for the Treasury and as such I think ratings downgrades by S&P and Moody’s and Fitch are inevitable before the end of the year.”

What we think

It’s not always nice to be “right” when one looks back and sees that their calls were fairly accurate.  So while this week’s news and market played out as we thought, with the ultimate outcome is that South Africa, and South Africans, face continued economic, political and social uncertainty and discomfort in the years ahead.  We all continue to quite literally pay for years of political and fiscal ineptitude (and worse).

Post the MTBS, we felt the ZAR.USD could find a new range of 13.95 – 14.20; however, at the moment we are already teetering slightly weaker at 14.25.  The concern is that we are now just one month away from the Ratings Agencies decisions – indeed, the initial rhetoric is predictably bearish – which in turn will be followed by the ANC conference in December.  Notwithstanding global economic and political news and surprises, as well as pockets of strength within the volatility, the ZAR outlook simply cannot remain anything but negative in the short- to medium-term term.  We believe 14.50, 14.70 and 15.00 remain realistic targets between now and year-end.

Have a great week everyone!