Will Rate Relief halt Rand Rally?

What we know

It was a tale of two halves this week as the ZAR responded to two long anticipated events:

First up, was Moody’s announcement on Friday which confirmed SA’s credit rating and improved the outlook from negative to stable. While the market was pricing in no change to the rating, the improved outlook was somewhat more surprising and as such the ZAR.USD strengthened to the 11.60 level early on Monday. It seemed likely that a test of recent support at 11.50 was on the cards; however, caution ahead of the MPC’s decision halted further downward momentum.

Although the market had gradually been pricing in a cut in local interest rates, given that inflation has continued to ease off in recent months, the ZAR has sold off around 1.5% since the announcement. The MPC does see risks to the inflation forecast as being balanced; however, they would like to see it print still lower than recent months and don’t expect to see further sustained ZAR appreciation.

Together, these positions stand firmly against further cuts in the near term.

Globally, the main positive was an apparent easing in trade-war tensions between the US and China. Trump’s opening gambit may well have been just that: heated rhetoric to set the scene for negotiations towards a more moderate outcome. Politically, the co-ordinated expulsion of 130 Russian diplomats from 22 countries ensured the “Chilly War” continues to add to growing tensions between Russia and the West, while the furore over Facebook’s data-privacy breaches put pressure on global equity markets.

What others are saying

26 March 2018

Fin24 – Rand may retest R11.50/$ on good economic news – analyst

“The sentiment in South Africa has lifted markedly in the past four months, and with the latest influx of good news we could see the rand enjoying a favourable run in the short term,” TreasuryOne dealer said in a market update on Monday morning

“How many times the MPC will cut remains to be seen, as there is a fine line between South Africa cutting rates and developed markets hiking rates where the rand will start to lose attractiveness in the carry trade game.”

RMB Global Markets Daily Report

“We expect market reaction to the announcement to drive the rand stronger, potentially gaining 15c-20c against the US dollar in the near term, but a retracement is likely in the next few weeks as global factors become dominant again.”

27 March 2018

Money web – News : Rand weaker as S&P warns on economic headwinds

“Our shares are trading at big discounts and might become a target for foreign investors,” said Greg Davis, equities trader at Cratos Wealth… “We are surprised that the market is not a lot stronger after the positive news from Moody’s and a good chance of a rate cut tomorrow.”

Business Times Africa – Connecting the dots between the hike in South Africa’s VAT and inflation

“In my view the most appropriate approach would be for the central bank to ignore any inflationary impact of the rise in VAT. For one year the inflation target specification of 3% – 6% should exclude the VAT increase to serve the best interests of all South Africans.” said Head of School of Economic & Business Sciences, University of the Witwatersrand

28 March 2018

ETM Analytics: Morning Insight

“More good news was also received yesterday from another ratings agency, namely S&P, which revised very strongly upwards its growth expectations, effectively doubling them from 1.0% for 2018 to 2.0%, anticipating 2.1% in 2019…as such, sentiment towards the ZAR may very well remain bullish for the foreseeable future. Although not reflected completely in the performance of the ZAR, this is an environment which will translate into further potential ZAR gains.”

“The South African Reserve Bank’s message on Wednesday that the rand is now “somewhat overvalued” is one more sign that the recent rally is running out of steam…Capital Economics said in a note that they expected the rand to weaken and that rates would remain on hold for the remainder of the year.”

29 March 2018

Bloomberg Markets: Article – Won Turns Quarterly Drop Into Gain as Kim Extends Olive Branch

“Investors seem to be betting on won strength as the so-called ‘Korea discount’ is relatively lifted with tension easing,” said Park Jeong-woo, a Seoul-based economist at Korea Investment & Securities, referring to the history of tension between South and North Korea.

ENCA: report – Moody’s Downgrades Eskom

“The rating action reflects the fact that, despite a number of improvements at the company in relation to its corporate governance and liquidity, there is limited visibility at this juncture as to Eskom’s plans for placing its longer-term business and financial position on a sustainable footing,” Moody’s said on Wednesday.”

RMB Global Markets Daily Report

“The rand’s weakening response was expected as the rate cut reduces the carry returns. All the local factors: politics, ratings, rate decisions are now in the price, and we revert back to truly tracking global sentiment unless local economic growth surprises significantly to the upside.”

What we think

At last if feels as though the dust has settled with the big events most likely to impact directly on the ZAR and its outlook having passed over the past 4 months. And all things considered, things are looking decidedly more rosy for the country than expected by most.

We now look forward to trading in a “normalised” currency: one with reduced volatility that responds more to local and global economic fundamentals and news, rather then political and structural noise and shocks. As such, global growth prospects and investor sentiment, in conjunction with local data, are likely to be key determinants of the Rand’s fortunes in the coming months.

We still consider an unwinding of the “carry trade”, as mentioned last week, to be a potential risk leading to a ZAR sell-off and the rhetoric building up to an election in 12 months time with the potential politicizing of highly charged and sensitive topics (land expropriation chief among them) does raise the possibility of heightened investor risk aversion.

Unforeseeable shocks aside, we maintain our 12-month range of 11.50 – 12.50 for the ZAR/USD.

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