TreasuryONE RAND OPINION PIECE – Feb 2019
By TreasuryONE dealing team
The Rand has enjoyed a fantastic start to 2019 and is currently one of, if not, the best performing currency in the world. The performance is in stark contrast to the picture that was painted in December. There are still some recurring themes that will continue to affect the market, but a few new ancillary factors have also seeped in.
The old familiar factors that are still evident and relevant in the markets currently are:
- The US Fed stated that they are going to be patient in their interest rate hiking approach and hinted at not hiking in 2019.
- The continued US-China trade talks which have resulted in some positive news of late.
- The Brexit saga and the continued uncertainty in Britain and the EU.
- The ECB that is stuck with a currency bloc currently experiencing low growth and that rates will in all likelihood be kept unchanged in 2019.
- Yield-hungry investors start looking at EM again as major central banks are hitting the pause button.
- The slowdown in China regarding trade and GDP and how this will affect the world economy.
- The impact of global growth concerns.
While the factors as mentioned above have an impact on the Rand, there are a couple of Rand specific factors also:
- The State of the Nation address by President Ramaphosa on the 7th of February.
- The budget speech that will be delivered on the 20th of February.
- The real possibility of a rating downgrade
- The general election that will cause more volatility in the Rand
This is how we believe all these factors will impact the market:
The US Fed is the primary driver of the markets worldwide at the moment, as we saw last week when the Fed announced its dovish stance on their interest rate hiking cycle. The Fed explained that they would stay patient and will react to market conditions should the need arise. The impact of the Fed turning dovish was EM market positive and EM’s traded on the front foot and the US dollar is starting to look a little vulnerable. This has sparked some fear in the market that the US economy is not as robust as first thought and it could have an impact on global growth.
There is still some speculation about how well the US-China trade talks are going, with rumours ranging from fantastic to miserable. We’ve seen Huawei being sued over intellectual property rights infringements and whether this will be seen in a negative light in the overall trade talks remains to be seen. There is also a possibility of President Trump meeting his Chinese counterpart in February. More clarity on the trade talks will probably be gained when we hear President Trumps State of the Union (SOTU) address today (5th of February).
While the US government shut down has been temporarily ended, the controversial Mexican wall policy that President Trump wants to push through Congress, threatens to shut down the US Congress again. Expect the SOTU to contain mention of the outlines of his plan to fund the project.
The US dollar could experience a period of volatility as there are a couple of contrasting forces at work in the US market.
On the other side of the pond, the Eurozone and the ECB is caught in between a rock and a hard place as the European growth story has hit a couple of snags. Germany, the largest economy in the EZ, had expanded at the slowest rate in five years. The slow growth rate will be detrimental to the EZ growth overall and with inflation not at decent levels, it will probably force the ECB to sit on their hands as no interest rate hikes are expected in 2019.
This comes after the ECB stated last year that they might look at June/July to start normalising policy. With the latest round of data, there is a strong case that the ECB will only hike in 2020 at best and there are quite a few commentators out there that are calling for a QE to be introduced again.
The mess that is Brexit is set to continue as Theresa May’s proposal was rejected by a resounding majority of 230 votes. It did not resolve central questions on trade, immigration, or the nature of the U.K.’s future political relationship with the EU. There has been a lot of calls for another referendum as some of the details that have emerged were not considered before the first referendum, such as the cost of Brexit and the contradiction that Britain will find itself in where the UK wants to close up shop but be open to the world at the same time. Theresa May needs to pull a rabbit out of the proverbial “Brexit hat” on the 13th of February to give MP’s another chance to consider proposed alternative exit measures. Expect quite a lot of volatility in the months ahead.
The developments in the US and the world markets have made EM’s the flavour of the month again. The fact that EM’s are in vogue/style at this stage is down to a Yield-seeking play by investors as major economies are hitting the pause button on their interest rate hiking cycle. There are however still a few red flags waving before we declare this an EM year.
The first is the current slowdown in the Chinese economy that will spill into the global growth story that can cause a run to safe-haven currencies and leave EM markets exposed. The US-China trade talks also hold the key to the direction of EM in 2019 and positive trade talks should have a positive effect on EM’s.
Secondly, EM’s are very susceptible to the drain in dollar liquidity that can happen should the Fed change their stance at any moment. With South Africa being a proxy for EM’s, a change of heart by the Fed could have immediate consequences for the Rand and other EM’s.
On the South African side, the Rand enjoyed its best January in recorded history as a result of the EM positive wave and is still firmly entrenched in the positive sentiment. However, the Rand has some event risk in February that could cause some volatility.
The first is the State of the Nation Address that happens on the 7th of February. We expect the President to continue with his investment drive policy but with particular emphasis being placed on stamping out corruption after peer countries explained that it is essential for corruption to be eradicated for the policy to succeed. This has the potential to cause some Rand volatility.
The second event is the Budget Speech on 20th of February, which potentially poses the biggest threat to the Rand. A lot of focus will be on the Finance Minister and on how he plans to balance the books somehow or at least reduce the budget deficit without putting the taxpayers into dire straights. The effect of the budget will have a direct impact on the credit rating of South Africa and should the budget be received poorly another rating downgrade would only be a formality.
There is also the “small” matter of the national elections in May. While still on the horizon it could start impacting the Rand if events leading up to the election turn violent and disorderly. The fact that everything is finely balanced at this stage can change within a blink of an eye, and it will not take much to teeter over the edge.
In the short term, we believe that any level below R13.50 against the US dollar is an excellent time for importers to hedge themselves as we feel we are heading for the bottom of the range. However, should exporters have to hedge, an instrument that gives potential participation would be our advice, as we believe the Rand will slide back above the R14.00 level again.
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