Rand rides the storm ahead of Moody's decision...

This last week turned out to be a great comeback for the Rand, on the back of a very poor start to it!

When we saw the market touch over R12.10 in the first half of the week, many were calling for it to go higher.

But, contrary to natural logic, with fears of the #JunkStatus looming, the USDZAR moved the opposite direction, closing Friday around R11.70!

So, an amazing turnaround...what could have caused it?

Well, it was certainly a week of interesting events, so maybe we can gain a little bit of insight into some of the sentiments that were floating around, based on the events we saw.

Let's take a look...

First things first, our forecast from Friday of the previous week was issued, with the predictions for the days ahead - and it did not look good for the Rand...an expected bottoming out was coming shortly, unless the market broke below R11.73...

USDZAR_STU Click to enlarge

And what followed were some very interesting happenings...

  • The fated Moody's rating announcement - which left us hanging until after business had closed - and thankfully, a reprieve for now!
  • Ramaphosa takes action - finally, the suspension of SARS Head Moyane...about time!
  • One African Currency? - an interesting proposition was put forward this last week, as to one currency for the whole of Africa - is this possible? More on this later...
  • African Commercial Free Trade - another interesting prospect on the African front, all stemming from the agreement of African leaders at the 10th Extraordinary Summit of Heads of State and Government
  • Fed Interest Rate Hike - as expected, we saw a 0.25% interest rate hike from the Fed.
  • World Trade War begins - or at least it looked that way, as the US's careful steps in relation to China turned sour this week.

This week was all about the countdown to the #JunkStatus decision, but it turned out that there was a lot more that came too.

So...firstly, Ramaphosa's suspension of SARS head, Tom Moyane...and he will now face disciplinary hearings. While a lot is unknown, there is still more than sufficient information to justify this decision. This was set out in articles and videos by both MoneyWeb & Fin24...

All in all, a very good and solid decision by Ramaphosa to suspend him.

And Ramaphosa continued, as always, to feature in the news for the week, and next it was in relation to the new African Free Trade Agreement.

This has just been signed this last week by African Leaders at a summit, and Ramaphosa believes that "This is an opportunity that is going to yield great benefits for all countries on the continent as well as big business, small companies and micro-traders,".

In essence, what the agreement is meant to do is that it should provide new and meaningful trade and investment opportunities across the African continent. This remains to be seen...

At the same summit, Ramaphosa touted one of the more interesting concepts that have been heard in recent times, and that was the idea of One African Currency.

Now, while this is a fascinating idea, the logistics of it are quite something to consider:

  • A single currency for Europe was a challenge of note, with 19 first world countries using the Euro.
  • A single currency for Africa (with around 54 different currencies in a third world continent)....now that is lifting the bar in the challenges stakes!
  • Uniting disparate economies under one currency can never work long term. The survival of the Euro as a single currency came under severe strain during the European debt crisis, due to higher debt and economically poorer members Portugal, Ireland, Italy, Greece and Spain (the four little PIIGS). Preserving the Euro has required massive bailouts - and the problems have not gone away.
  • Now imagine a single currency for 54 African nations combining the strongest and weakest - with most of them in the PIIGS category at best...
  • One of his reasons for doing this is to "rid ourselves of this colonial mentality that demands we rely on other people’s currency" - this comment does make sense at all - having a single African currency IS relying on other people's currency!

Overall, effectively pegging values of African currencies against one another may sound like a good idea for free trade within Africa, but it can never work if the underlying fundamentals do not support this peg (even the Swiss had to learn this lesson - as we illustrated in one of our articles a few years back).

In essence, a currency is there as an adjusting mechanism to facilitate international trade between one economy and another, and to compensate for changes in the price of goods or services between these countries, which at its base level is the change in productivity and labour cost - and feeds into local Producer Prices.

As can be seen from the chart below - the Rand has needed to depreciate against the US dollar by close to 6% per annum based on producer price changes over time.

Now just imagine what this chart would have looked like if the Rand had been pegged to the Zim Dollar the past 25 years!?

Perhaps I will close my case there....

To get back to the local currency, this is how the week actually played out in picture format, with the Rand missing our upside target by just 1c on Monday before it reversed and strengthen gradually through the week, with positive sentiment driving it below 11.75 with the likelihood of #JunkStatus downgrade becoming less and less likely...

The week ended off on a rather rough patch internationally, as President Trump announced on Thursday that a much needed (but much dreaded) tariff was going to be imposed on China.

This was going to affect roughly $50bn of Chinese Imports - these are big numbers, and you would expect so with a 25% tariff...

...and China immediately responded, imposing 15-25% tariffs on certain US imports by China.

In no time, it seems a much-feared trade war had broken out.

AND then the US Treasury dropped another bomb, as they plan to restrict Chinese Investments in certain US Sectors.

The DOW Jones tumbled. As did Asian and US equities.

But those who were not part of the anti-Trump brigade, could certainly see that some changes are needed. The US, with the largest trade deficit in history, is in dire need of reversing this trend, which has been spiraling out of control, mostly due to cheap imports (especially from China due to a currency that has been kept artificially weak), which have had a drastic effect on the US manufacturing sector.

Back locally, at the close on Friday, all eyes were still on Moody's...but with no decision expected until after markets closed, the Rand close the week at a healthy 11.7270....

And when the announcement came, all could breathe a sigh of relief as Moody's decided to keep South Africa's rating at one notch above #JunkStatus, citing changes to Treasury, SARS and state-owned companies, as well as an improved economic outlook as reasons for its decision (strangely, the land expropriation factor was down-played).

So off the hook....for now!

So a pretty tumultuous week, which had somehow resulted in a stronger Rand, despite the fundamentals, events, and economists saying otherwise. Who would have thought?

The Week Ahead (26-30 March 2018)

The week starts with the Rand on the front foot (and the Aussies very much on the back foot in a saga that will leave their image tarnished for some time!)

The Rand strengthened 12c at the Asian open on the back of Moody's reprieve...

which will no doubt restore economists' theory that positive news strengthens a currency...and vice-versa.

I trust by now that you (as a subscriber to these Weekly Reviews) know better.

But let me say it again:

Events are merely triggers - NOT direction givers!

And that's why we give our clients an objective view of where the Rand is likely to head the next few days, weeks, months and years...

...giving them what they need to make informed and educated exchange decisions.

The result: More clarity and peace of mind. And improved profits...with less stress, effort and time.

Why don't you test-drive this for yourself - free of charge for 14 days?

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Kind regards,
James Paynter

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