What budget will we get?

What budget will we get?

It is, at least, in South African terms, the week we have been either waiting for or collectively holding our breath on. Yes, the South African budget will be announced on the 24th of February. One of the areas of concern is how big the expected budget deficit will be in light of the COVID pandemic and how the deficit will be funded in the future. In essence, we expect the budget to surprise on the upside, with tax revenue collection to come in better than initially expected. From what we read from various market participants, tax revenue collection could be better by around R100bio from what was expected in the Medium-Term Budget speech. This, in turn, could result in the government issuing fewer bonds to fund the shortfall in income, and that could see the debt to GDP ratio come down slightly. The other question from the budget will be if Mr Mboweni can keep the expenditure side from further ballooning. We have seen the government win court cases not to adhere to salary increases for the public sector. Will they keep to this 0% increases?

Andre Cilliers Currency Strategist and Wichard Cilliers Chief Dealer discussing the week ahead with a specific emphasis on the Budget Speech

We are already experiencing some volatility in the ZAR this morning as rising yields in the US has caused some risk-off sentiment in the markets. The rise in yields has been spurred by a strong round of US economic data, and perhaps that the FED will hike sooner if the reflation theme continues. Do we see the taper tantrum similar to what we saw in 2013? Will the FED, similar to 2013, reduce the amount of liquidity around and is that what is causing the rise in US bond yields? Although real yields in the US are still negative, they have also been rising.

Looking more broadly at the international market, we have seen the US dollar slipping against most of the major currencies but is still in the wider range of 1.20/1.2150 against the Euro but testing the upper end of the range. However, we have seen the Dollar index hold on to some key levels, and if the yields continue to rise in the US, this will support the broad-based dollar as well. We have already seen Emerging market currencies give back some of their recent gains, and currently, only the major currencies are still supported.

These days you probably cannot write market commentary without mentioning Covid-19 and what is happening on this front. We have seen many vaccinations occur, and Israel this morning has stated that using the Pfizer vaccine reduces the transmission of Covid-19 by 79%. This positive vaccine news surely bodes well for worldwide recoveries. We have seen the UK, which is still in lockdown, roll out its vaccine program, and 50% of the UK population will have received at least their 1st vaccine jab by the end of April, most probably. Looking at the graph below, supplied by Nordea, one can see that there is a strong correlation between a stronger USD and the successful vaccine rollout.

Looking at the rest of the data front, there are little noteworthy data that will be released this week, and that will put more focus on events in the US in terms of the US dollar and Treasury Yields.

As we stated earlier, the Budget Speech will dominate all the headlines this week, and the local market will watch with bated breath as we await our fate, but it could be better than expected. From the local currency perspective, the ZAR has already been under pressure at the start of this week, and we could expect to see some resistance come in around the R15.00 level. For now, we still believe the USDZAR is trading in the broader R14.50 to R15.50 range, and we will need to see how the rise in US yields will affect emerging markets and the ZAR to trade. We could expect some risk-off sentiment, and exporters should take advantage if we see USDZAR test the upper end of the current range. The graph below shows that the R14.50 to R15.50 range has held over the last quarter or so.