Rand Loses Ground in Topsy-Turvy Week

Slightly belated, our Rand Review has arrived. I hope you all had an enjoyable and relaxing long weekend, and are ready for the short week ahead 🙂

We are back again to set you up with some diagnosis of the previous week, and provide some idea of what is coming in the next few days...

...and unfortunately, things are not looking to good if you are a ZAR supporter. If you are an exporter though, you may be in for some much needed relief.

We have already seen the Rand give back a lot of its gains, as it rushed upward toward R12/$ again.

Once again, this week had all kinds of global and local news, volatility and more.

Let's see how it unfolded...

Initially, going into the week, things were looking good. A stronger Rand, moving down into the R11.75-11.61 area...but the wave analysis was suggesting that this was NOT going to last.

USDZAR_STU Click to enlarge

What followed was no lack of influential events this last week...and just to name a few of them, here were our biggest picks:

  • SARB Rate cut - a two year low for SA interest rates, as SARB made the big decision to cut interest rates by 0.25% this past week, bringing the interest rate down to 6.5%...
  • Trade War fears simmer - the international front went a little quieter this week, but global trade war fears continue
  • SA escaped downgrade - ...but Eskom did not, as they got hit by a further downgrade by Moody's.
  • SA Trade Balance turns positive....a small surplus after January's record deficit
  • Trollip saga - as the EFF appears to gain more and more support and media attention, they attempted to oust Athol Trollip this last week in PE...but it ended in a stalemate.
  • Hermanus - things started to get ugly in Hermanus this week, as a few thousand persons took the land expropriation into their own hands and attempted to seize land...

As the week began, all eyes were on the more long term effect of Moody's giving SA another chance on their credit rating.

This was seen as expected, but still very positive. Surely this would just drive Rand-positive sentiment through the roof this week, on the back of all the other positive changes?

Well, the markets don't quite work how one would expect them to.

Also, there was some voices of reason - highlighting the massive, potentially economy-crippling ideas, such as Land Expropriation. This is more than a mere challenge for Ramaphosa, if he seeks to not only avoid #JunkStatus again, but grow the country out of a very poor position.

And as expected by Dynamic Outcomes with our forecast on Friday, the effect of Moody's decision was short term only, as we saw the Rand weakening significantly in the latter half of the week (see below - click to enlarge)...
The big turning point for the week, turned out to be the Interest Rate cut by SARB, by 0.25% as the market faltered horribly following that.

While it was the turning point, bear in mind that it was the trigger...not the cause of the weakening itself.

Anyway, with that in mind, it was interesting to see this decision.

Especially after just last week, the USA increased their interest rates.

This is seen as Rand negative from a carry trade point of view. It means that the interest differential has reduced by 0.5% which is not a big change, but it does reduce the attractiveness of SA money market returns, nonetheless...

The good news - according to economists, this is the last time we will see a rate cut...for now

Charts are always interesting. They show out what even common sense often does not. This week, we came across two very interesting ones:

SA's 10-year bond spread vs peers

Bearish Rand bets are at a 10-year low, and low volatility

And believe it or not, the economy actually managed to turning around its Trade Balance to a surplus, just one month after recording its worst deficit in 28 years.

But as can be seen from the chart below, it is going to take more than that to offset the January's disaster month, which all but wiped out the previous two months' healthy surpluses.

Other news for the week was political noise in PE over Athol Trollip, and the ever increasing land debate rising to boiling point in Hermanus and also in Johannesburg area...things are starting to get messy on this front

Also, Eskom got hit by a double whammy, as we saw a downgrade from S&P and Moody's, sending them deeper into junk...things are not looking so pretty even with a new management team at the helm.

And frankly, who can blame the ratings agencies for doing this, citing no clear plan been put in place to turn things around..

And in no time, the short week was over, and we were into the long Easter weekend...!

The Week Ahead (2-6 April 2018)

And here we are - a quarter way through the year already.

The week starts with good local news and bad international news.

Good news of course being a 3-1 thrashing of Australia by the Proteas - their first home series win against the Aussies since 1970!

And the bad news - trade war fears have increased as China announces imposing tariffs on USA goods in retaliation to Trump's tariffs on steel and aluminium.

Where this will end is anyone's guess, but clearly Trump is intent on reversing a crippling trade deficit and protecting the US economy from cheap imports - and theft of intellectual property from US companies. Watch this space....

Where to for the Rand in another short week?

We expect some range trading in the early part of the week before we break out of this and start trending in earnest.

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Kind regards,
James Paynter

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