August 15, 2017
Weekly forex update – 15/08/17
What we know
Economic data releases were few and far between to start the week: Eurozone PMI came in slightly lower than expected on Monday while the PMI print in the US was marginally better than what the market was looking for.
The SARB’s leading indicator was released on Tuesday at 95.8, in line with April’s print. Continued weak releases of this indicator, while obviously concerning, are of no surprise given the current economic climate.
Somewhat sluggish UK GDP numbers on Wednesday were largely ignored, as the outlook for Sterling remains clouded by the ongoing Brexit negotiations and the market’s focus was almost entirely on the upcoming Fed rate announcement.
The perceived dovish tone coming out of the Fed saw expectations shift to a greater probability of no further rates hikes this year, which put the USD firmly on the back foot. The improved risk appetite saw emerging market currencies rally with the ZAR firming to recent best levels of 12.86 vs the USD early on Thursday morning.
Thursday saw PPI figures being released. The 4.0% year-on-year figure was significantly lower than previous, as well as market expectations, with food and transport disinflation being the main contributors to the slow-down.
What others said
Although much of the domestic data will not be particularly happy, it will continue to speak to the kind of environment that will encourage the SARB to cut further which in turn still holds the potential to keep bond market inflows buoyant and generally ZAR supportive…
…whilst there is little scope for the unemployment rate to fall to any significant degree unless for background statistical reasons.
…it would only take a hint of dovishness given the Fed’s communication for the USD to be pummeled and it came in the form of the Fed highlighting more pointedly, the lack of inflation follow-through.
Although the rand has performed resiliently despite various local factors, it has thus far failed to make any new lows, technically this would suggest a significant possibility of a test toward the upper end of the prevailing range.
The rand had already recouped some of the losses suffered following the SARB’s 25bp cut in rates last Thursday as it became clear that global monetary policy will remain very accommodative for some time, especially with no strong hints of tapering by the ECB last week.
What we think
It would appear that there is a tendency at the moment by commentators to focus on either global factors and how they may impact the ZAR, or local political and fundamental drivers. We certainly like to focus on fundamental drivers as these are somewhat more predictable than the noise created by daily and weekly news-flow and economic announcements from abroad.
As such, when considering the current economic and political environment in which South Africa finds itself, we struggled to understand why the market was prepared to push the ZAR.USD below the 13.00 level. This did, and does, seem overdone to us and we are far more comfortable with a 13.00 – 13.20 range in the short-term – we are not particularly bearish on the ZAR we just believe that the recovery from the recent highs of 13.65 has been overdone.
One of the key reasons for the ZAR recovery over the past 15 months has been the so-called “yield play” whereby capital flows to those countries with higher interest rates. Despite the short-term comments and outlooks by the respective central banks, we are of the opinion that we are at the start of the unwind of this situation: few would argue that the differential between SA and US interest rates will narrow over the next 6-12 months, as the local MPC will either cut or maintain rates, whereas the Fed will either maintain or hike rates. This is a major reason for us calling the ZAR lower from here.
For much of the past ten days, we’ve traded a fairly narrow 12.89 – 12.96 with breaks through either level proving to be short-lived. As this week draws to an end we believe that the ZAR bears have the upper hand at the moment and that we could see a new range of 13.03 – 13.18 being in play in the short-term.