Last week we saw what we had suspected all along, that the rand was slowly starting to run out of steam and that it could return to the R14.50 level after testing as low as R14.05 only a week or so ago. However, the rand overshot the R14.50 level, and we have seen the local currency trading up to R14.85. The rand is currently living up to its reputation of being one of the most volatile currencies in the world.
The reason for the sudden weakness in the rand is three-fold: The first, and the one we have been harping on the most, is the rand’s momentum and that a rebound was more than likely given the extent that the rand ran in the preceding couple of weeks. The rand was trading substantially stronger than its peers and we believe that behind the scenes there were some big hedging transactions taking place, leaving the rand on its own. This washed out, and the rand resumed to trade with its peers.
The second reason for the rand weakness is a stronger US dollar. After disappointing US data over the past couple of weeks, we saw that the US consumer is steadily chugging along, with the US retail print coming in at 0.7% versus the expected -0.8%. This caused the dollar to move from above the 1.18 level to seriously make a charge at the 1.17 level. Should that level break, we could see the rand come under severe pressure.
The third and newest factor is the headline news from China, that the country’s second-biggest property developer, Evergrande, is set to default on its commitments unless the state can bail it out. The fact that the Chinese state has thus far not wilted has caused a bit of panic in the market, and should they not relent, it could send a shudder through the Chinese economy, and thus also the world’s economy. Metal prices have bled the last couple of days since demand will surely suffer should the company collapse, as Evergrande currently has 1,300 real estate projects on the go.
With the international markets spooked, sentiment has clearly gone to “risk-off”, and we could see further swings in the sentiment by the end of the short week in South Africa. This week’s primary focus will be on Central Banks, and the chief among these is the US Fed that will announce its interest rate decision on Wednesday. The markets will keep a close eye on any tapering talk, as tapering and inflation has been the buzzwords lately. This event could hold some risk in for the rand as a hawkish Fed could push the US dollar below 1.17.
On Thursday, we have the MPC of the SARB announcing their interest rate decision, and with the current state of the economy and rates lower across the world, we believe that the MPC will hold the rate steady. Of interest in the speech may be if any of the growth forecasts have changed, and if we can pick up any indication from the MPC of possible further rate movements in the future. We expect the rand to be under pressure for the early part of the week, and it could be a bumpy ride heading into the long weekend.
See below the USD/ZAR movements – we suspect we can be toppish around R14.89 in the short term.
The chart below ties in the Evergrande problem with what is happening with credit extension in China:
- The Chinese Credit impulse (Dark Blue)
- Dollar Index (Grey)
- Palladium (Green)
- Platinum (Light Blue)
In this chart, we show that the credit extended in China is slowly but surely being tightened. With China being the biggest consumer of commodities in the world, tighter credit conditions mean fewer funds available to purchase commodities which will cause commodity prices to drop. It is also worth noting that due to the tightening conditions of credit in China, a situation like Evergrande was almost inevitable with companies being over-leveraged and unable to service their commitments.
Another fascinating thing about this chart is how correlated the Dollar Index is to Chinese credit, which begs the question: What drives the US dollar? But that is a story for another week.