Rand firms on #CabinetReshuffle & rate increase

Some thought a few months ago, in the midst of the Turkey crisis, that we would never see sub R14/$ levels again...

...well, that was just what we got this week, as the Rand spent the most part of the week on the front foot, breaking as low as R13.72.

And that is exactly what our short term Rand Forecast from the previous week had suggested - a topping out below 14.6400 before falling down towards 13.86 and below (see chart below).

USDZAR_STU Click to enlarge

These gains have been crucial on a number of fronts:

  • Keeping fuel prices from spiraling out of control (combined with oil price collapse)
  • Helping importers to bring items into the country at lower prices (of course exporters will not be too happy)
  • Therefore slowing inflation, which is affected by both of those items
But there is still some way to go for the market to get back to what many consider to be fair value.

Let's take a look at some of the key factors which influenced the week...

Here are a few of the biggest moments of the week:

  • Interest rate decision - the long awaited SARB announcement finally arrived...and the results were not what was expected by many.
  • #CabinetReshuffle time - why not combine the interest rate decision with a Cabinet Reshuffle as well, just to add to the excitement, as Ramaphosa announced new replacements...
  • Brexit turmoil - despite progress being made between the UK and EU, the overall picture in Europe was still as unsteady as ever, leaving the Pound in a very weak position.
  • Crypto markets collapse - the bubble which lead up into the end of last year has well and truly popped, and we did predict this would happen, back on 21 September 2017...
  • State capture hearing - the painful process rolls on, revealing layer upon layer of corruption. Painful to watch but essential to restoring any integrity to the government
And this is how it panned out...in one of the less volatile weeks we have seen from the markets in a while.

It was the week of Thanksgiving in the US, and Black Friday to end off the week

Couple that together with the ongoing State Capture hearing, Brexit, Interest Rate decisions, Cabinet Reshuffles, collapsing oil prices and more, and it became a bit more exciting!

However, the Rand stayed stable to start the week off.

Right through until Wednesday afternoon, we did not see the market break the R13.92-14.16 trading band...

On Wednesday though, was when the action began, with the Rand punching to sub R13.85, just one day before the Interest Rate Decision from SARB...



As we mentioned last week, the MPC were between a rock and a hard place with their decision...

... needing to stimulate an economy that is in technical recession on the one hand,

... while needing to tame inflationary pressures as a result of a weaker Rand and high oil prices on the other.

Almost every analyst had this being a "coin-toss" decision.

If you have been a client for long enough, you may remember how we showed that Central Banks don't set interest rates - the market does (see our blog article here).

The one indicator we have found to be the most accurate is 3-month Treasury Bills, which had shown a 25 bps increase since June, suggesting that SARB would have to follow suit.


...as it happened, on Thursday, SARB increased the Interest Rate by 25bps to 6.75% - a bit of a shock call.

The Rand liked this, and moved lower toward R13.70/$.

But was this a Rand positive or Rand negative decision?

There are always two ways of looking at it:

In this case, good for investors, but bad for the economy. Which makes forecasting the Rand direction based on interest rates no more than a coin toss.

By contrast, before anything was even remotely clear as to the interest rates, we had predicted days prior that we would see the Rand top out before make strides toward R13.83 and below to the Dollar(see above forecast at the start of this email)...

Ramaphosa also announced on Thursday some changes to his cabinet...

...thankfully not a Zuma-style #CabinetReshuffles, as this one had a bit more order and clarity in the decision making process.

However, analysts suggested that this did not meet the country's expectations, with only a few small changes, forced by the resignation of Gigaba and recent death of Edna Molewa.

Perhaps Ramaphosa is planning to play his hand at a later date, but for now, his small changes were well received by the markets along with the interest rate increase, as the Rand closed below R13.80 on Thursday...

There were many other headlines from the week:

  • Firstly, the big news heading into the new week came from US Fed Vice Chairman, who stated that "policy is getting close to neutral due to evidence of global growth slowing". In basic English, this means less rate hikes in 2019 - great news for the Rand and emerging-markets in general.

  • Trump's clever poker game has helped oil prices to plummet further, day after day. The WTI Crude has broken down to below USD 55 a barrel, and Brent Crude below USD 65 per barrel. Now just for the fuel prices to play ball, coming back to more affordable prices...

  • Brexit...this is fast becoming type of expletive for those in the EU. It was another huge week, where the momentum shifted from side to side, day by day. In short, Theresa May survived an expected vote of no confidence, as the Tory opposition was unable to muster the needed support to have the vote. Confidence in May is still very low, but she continues to fight and managed to secure a political declaration (in principle), outlining how the UK-EU trade, security and other issues will work. Despite this, analysts say that the Pound outlook was the most negative since the Brexit vote itself...

  • SA inflation has been a concern for some time now, and the IMF warned the Reserve Bank Regarding this, before their Interest Rate decision. They want the Reserve Bank to keep the inflation at the target of 4.5%, which is in the middle of their 3-6% target area. The latest figures came in for this month at 5.1% - a little higher than last month's 4.9%, but lower than the anticipated level of 5.3%. Hopefully the dropping of the oil prices and increase in Interest Rates will assist in bringing this lower.

  • Eskom continues to be a thorn in SA's economy, with every business relying on electricity, and not getting a consistent supply of it. It was revealed this last week that Eskom's capacity is at its lowest level in years. Coal supplies are low, and Eskom's Energy availability Factor (EAF) is now at its lowest level since 2004. These issues being sorted out are crucial to the economy going into 2019...

  • Lastly, Cryptocurrencies endured one of the most torrid weeks in a long time. Bitcoin went into absolute freefall, collapsing to nearly $4000! These are the lowest levels we have seen since the beginning of the Bitcoin "Gold Rush" back in September 2017. Not a good time to be a crypto investor - unless you are buying and getting everything at a major discount!
On Black Friday, there was some consolidation from the market, and we ended just over R13.80/$.

Some ground lost, but definitely not all the momentum built up over the last few weeks...

...now just for the ZAR to kick on and take advantage of it!

The Week Ahead (26-30 November 2018)

The market has retested lows this morning before retracing.

We have a few events that could be triggers - SA and trade balances being ones of interest. And of course the Brexit summit resumes today.

But, as we said last week, the fact is, you will never get any direction based on news and events.

Instead, we have found the best way is to forget looking at these for direction, and simply listen to what the market itself is saying - though price action and patterns of sentiment they display...

This is what the Elliott Wave Principle (our forecasting methodology) provides, which we use together with a combination of price-ratio analysis, momentum and time-cycle studies to give clients the most likely outcome for the next few days, weeks, months and years ahead.

Overall, based on our analysis, we still a Rand bullish bias in play, but don't expect it be all one-way traffic. To see the full details, why not give our service a 14 day test-drive.

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To your success~

James Paynter

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