The Dollar enjoyed a very strong week following its retracement, which left the Rand on the back foot, once again.
It was probably due for the Rand, as it had had a solid three weeks...
...and it all seemed a little too good to be true (our wave count suggested we were going higher...)
So, the big question:
- Is this the start of a continuation of the Rand weakening long term trend?
- Or is it just a temporary retracement, before the Rand starts heading closer back towards fair value?
Let's review the week, and get some insight into that...
There were some big highlights from the week which dominated the headlines:
- Petrol price - I guess we will start with the bad news and move on from there... News hit this week on Petrol prices which are soaring to record highs as we head into the holiday season. Not good timing!
- SA inflation worries - the petrol price brings more problems besides just the cost of moving around, as inflation is driven by this kind of increase, as well as some Eskom changes coming in 2019...
- NAFTA replacement - some good news for the week was a calming of the Global Trade situation, as the US were moving forward with resolving trade between themselves, Canada and Mexico.
- Italian crisis - yet another European country in strife, as Italy is on the brink of economic collapse, and yet is too big an economy to fail, as this would put such pressure on the Euro...
- State Capture testimony - all of the worms were coming out of the woodwork, as the hole which Zuma had dug SA into became clearer and clearer.
So, from a currency movement perspective the week can really be encapsulated into a simple explanation, using just two charts:
DXY (Dollar Index)
And then...
US Dollar versus South African Rand
...and that pretty much says it all.
The Dollar came ROARING back, to put it mildly, following a large retracement off its high a few weeks back - this pushed emerging market currencies really hard, sending currencies such as the Turkish Lira and Mexican Peso higher...
...so overall, a difficult week for emerging markets.
But on the whole, a difficult week for SA:
- Petrol prices were soaring, and showing no sign of stopping just yet. Oil prices had hit over $85/barrel, with the Iranian situation worsening by the day. This meant record highs throughout SA, but in fact the whole world, with 100c increases taking it to over R17/litre...eina! Major economies and smaller ones are all feeling the pinch globally, as the cost of living and doing business is sky-rocketed by things like this.
- To make matters worse, Eskom announced that they are going to be upping tariffs in 2019, meaning the cost of living moves higher. Now, what a combination of this and the fuel price meaning is that inflation rises all the more - as it is tied to cost of living. This in turn puts more pressure on SARB, who is already between a rock and a hard place, to increase interest rates to try and rein in inflation. It is a tough position to be in, as SA moves into the tourism time of year... The big question is whether SARB's inflation rate target band of 3% - 6% will be broken! Or maybe the question should be ... when?
But there was hope among many of a recovery before the end of the year, with important events which are still due to happen during the course of this month:
- Moody's credit rating review - this is a big one to watch, as we wait to see how much leniency and time the credit agency is prepared to give SA with the weaker Rand and higher inflation, and whether it can give the Rand the springboard which is needed with a favorable outcome
- Nene's mid-term budget - this could be very painful to watch, and last year's speech did not go well for the ZAR, as we saw it jump from R13.70 to R14.10 in just a few hours. This is another big sentiment event, which can provide some triggers for movement in the market...
- Bloomberg's economists believe that there is a good chance of an emerging market recovery, or rather "rescue", by year-end, which hopefully will bring the Rand to a stronger level as we move into the new year. However, October is noted as a high risk month, with that budget speech and then credit rating to follow. This is going to be a big month to watch...
And then there were some of the other headlines for the week:
- The NAFTA (North American Free Trade Agreement) between the US, Canada and Mexico has been in the US's crosshairs for the past few months, as Trump is seeking a more equitable replacement for it. A revised agreement was put forward on on Sunday, and a last-minute deal seemed to have been reached between the US and Canada. NAFTA 2.0 is now moving forward, with some big changes coming for car-makers, farmers, all digital and financial services and more... Overall, this is good news, bringing some stability to the Trade War which persistently drags on...
- During the course of the week, more testimony came from high ranking officials on the State Capture debate. Officials such as Nene revealed some damning details, showing out just how deeply Zuma had managed to dig SA into an economic hole. Nene effectively lost his job over the Russia Nuclear Deal, which would have cost about 90% of South Africa's budget for the whole year...with some decent size back-handers included you can be sure!
- The situation caused partly by this fiasco was confirmed by the World Bank as they released the growth forecast for South Africa, downgrading the GDP forecast to 1% for 2018, from the original 1.4%. It was going to take a scramble and a half to turn it around to ensure 2019 starts on the right note for the SA economy.
- The other talking point for the week was the new Mining Charter which was coming under scrutiny at the conference at the JHB Mining Indaba. Apparently this went very well, with the new Charter achieving industry buy-in, and hopefully bringing more stability to the mining sector as a whole. It is likely that this discussion still has some ground to cover, so stay tuned...
- Ramaphosa announced this week that his Investment Dream team has hit the ground running, and they have already had over 150 meetings with potential investors, spread across Nigeria, Saudi Arabia, UAE, Singapore, China, Canada, Ireland and Poland. There has already been fruit from these meetings in terms of investment, but still a lack of clarity as to what is being given in return for the investment!
The week ended with news of further US Rate Hikes being likely - hurting emerging markets further. However US Jobs numbers came through well below what was expected, just 134 000 instead of 185 000, but still decent growth nevertheless, pushing unemployment to 3.7%, its lowest level since 1969!
Overall, the Rand sustained a slightly more stable day, ending around 14.75, after touching R14.93 earlier in the week...
The Week Ahead (8-12 October 2018) |
Well, what does this week hold?
Not much on the economic calendar with locally or internationally, but that doesn't mean the markets will take a rest.
We expect some initial Rand strength but will be watching some key levels this week to confirm the preferred wave count. Should be some interesting days ahead.
Do you have any questions regarding the challenges you face managing your Rand exposures?
Or perhaps a question about getting a better rate of exchange?
If so, I would love to hear from you, to see what we can do to assist.
Let me know by leaving a comment below...
To your success~
James Paynter
