A tough Budget 2019 brings a stronger Rand

Well, well...what a week!

February 2019 continues to be one of the most interesting months in recent times when it comes to the Rand and SA's economics and politics.

This week was the big budget speech from Tito Mboweni.

And an important week for the Rand if we were not going to run away back over R14.50/$.

There was a pile of action, so let's get right into the review.

Before we get into the events, there was our forecast from Friday the 15th, giving the outlook for this tumultuous week:

USDZAR_STU Click to enlarge

The expectation was for the market to top out shortly in the 14.09 to 14.39 area, falling lower to test R13.9522...not what one would have expected from a week which included a very difficult Budget Speech, but that is what the wave count was saying...

...against every bit of emotion and gut feel, but that was the forecast we sent out to our clients on Friday.

There were a host of big events during the week, so here are a few of note:

  • Tito Mboweni's Budget 2019 - one of the toughest budget's in SA's history without a doubt, and a very difficult one for many to stomach...
  • SA's SOE plans revealed - this is fast becoming a swear word in SA economics, as the Eskom mess has continued to unravel. However this doesn't look like it is going to end anytime soon...
  • Trump's national emergency - this is not going according to plan (or maybe it is), with more than 16 states revolting against him in a court action
  • Brexit collapse continues - with less than a month left, things are beginning to just look worse and worse as more car manufacturers and businesses began to get the jitters.
Well, where do we start with the review?

It can only be with the nitty gritty of the Budget:

This may not have been the biggest point to mention first up, but it was a sign of Mboweni and Ramaphosa being serious about cutting costs back: Members of Parliament and Executives will not be receiving increases in 2019!

Perhaps they finally realize the cash is running out...

Anyway, here are the main highlights:

  • Tax revenue is revised downward by R15.4 Billion from October’s MTBPS
  • Expected revenue of R1.58 trillion versus R1.83 trillion expenditure
  • No increase in personal income taxes. A relief for many.
  • GDP revised down to 1.5% from 1.7%
  • SARS reboot, with a new commissioner to be announced in the next few weeks
  • The big one: Eskom’s restructuring into 3 independent parts will cost tax-payers R23bn over the next 3 years (Total cost: R69bn)
  • Fuel levies to increase...by a whopping 29c/litre for petrol and 30c/litre for diesel
  • One of the worst figures: Debt to GDP Ratio is expected to increase to 60.2% in the year ahead - a very dangerous level!
  • Small enterprises to be helped, with R481m to be put into the small business incubation programme
  • R8bn will be allocated to priority land reform projects...it was clear that Tito was keeping his hands clean on this touchy subject, because the world was watching. But it remains to be seen what policy the ANC takes on into the 2019 elections on this subject.
So, quite an earful. There was a lot more, which you can read over here

Not a positive budget, but it couldn't have been with all the present mess, yet Mboweni's delivery was a far cry from the likes of Gigaba's clueless attempt in 2018.

As always, promises and budgets are one thing - the proof is in the pudding. Will this all happen, and will it all make a difference?

And then of course, we get what effect it had on the Rand:



Just a few minutes into his speech, the USDZAR had already lost more than 30c, crashing to R14.37...

...only to completely turn it around to close the day below R14 to the Dollar!

Explain that one, economists...?

The budget is notorious for resulting in a crash flash for the Rand.
Which it did.
But the effect it had was turned around in minutes...amazing!

This perfectly validated our forecast from Friday, as the market reverses and moved down to touch R13.87 on Thursday...

...showing once again how you CANNOT look to the events to give you market direction!

There was a lot more that happened across the course of the week:

  • In the global space, Donald Trump was continuing to fight the battle against the Democrats, as he declared a national emergency to try and get funding for his border wall. There was a backlash of note to this, as multiple US States proceeded with suing the Trump administration for declaring the emergency. And at the same time, the talks between the US and China have been progressing and it seems that some form of deal might be available within the next month or so. Whether this happens or not, we will have to see - but it is very positive news! Many are depending on this coming through to provide some stability to the global economy.

  • Then in the UK, the Brexit debacle has continued to collapse bit by bit. There has been a revolt from the Labour party with multiple MP's leaving the party against the leadership of Jeremy Corbyn. Theresa May is asking the EU to save Brexit, and is clearly battling to maintain control of the situation. Honda is closing down a car plant because of this. Porsche is warning the UK that there is going to be a surcharge on post-Brexit deliveries. Who knows what is going to happen next, and the clock is ticking with just 32 days left as of today!

  • Mboweni's comments around the Eskom bailout, and that SABC must not take bailout requests lightly were welcomed and scorned by the different sides of the debate. The bailout was always going to happen, but it was a question of how bad the damage would be... Mboweni did question whether SA really needs State Owned Entities at all. A very good question, and one to which the answer is obvious!. At least someone is asking! At the same time, news arises that funders are talking to SAA again - who knows what is going to come out of this, but you can only expect another bailout...

  • Moody's weighed in on the budget speech warning that "it may be difficult for the SA government to restrain spending in the future". Any comments from Moody's at this stage is watched very closely, with their credit rating review of South Africa due on March 29. This is going to be a crucial one, because if SA survives this warning shot, then it shows that Moody's really does have some patience to see how the next year of economic activity works out in SA. We will be keeping an eye on this one...

  • Brent crude oil is over $65/barrel, up 6% from the same time last month...brace yourself motorists, because it looks like we are in for another petrol price increase. This will not help the inflation worries in SA, but it is yet to be confirmed what the damage will be.

There was a lot more too from this busy week, but we can't cover it all!

And with that, the Rand closed out the week just a touch under 14.00 to the Dollar, about 10c better off than where it opened on Monday....

The Week Ahead (25 Feb - 1 Mar 2019)

Can you believe it - we are already into the final week of February!

And what does this week hold in store?

Well, for a start, we have a speech by UK's Theresa May trying to salvage Brexit - which will be followed by (another) vote. And we also have testimony by the US Fed's Chair Powell.

Both these could provide big triggers for moves in the markets.

Coupled with that, there are some medium impact US and local data releases which could also weigh on market sentiment.

And then, of course, there is President Trump's ongoing battles on the South border wall and China trade war that will keep things interesting.

But what does this mean for the Rand?

Well, last week has shown that events do not give direction, but are merely triggers.

And, once again, we won't be looking to the events themselves to give us direction, but analyzing the patterns of sentiment to give us (and our clients with Rand exposures) an edge as to where the market is likely to head in the short, medium and long term.

Based on current analysis, we are expecting some possible initial weakness but within a Rand strengthening bias going into the week.

For more details, and a roadmap on where we expect the market to head the next few days weeks and months ahead, simply join us today and give our free trial a shot.

We are here to help make your forex experience decision-making more profitable - with less stress, time and effort.

To your success~

James

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