Non-Farm Payrolls triggers ZAR to end strong

A roller-coaster week for the Rand, which saw the market lose ground against all the majors in the early part of the week before clawing its way back - with a sterling Friday to finish off, rounding off what was a pivotal week's performance.

And yet, the Rand still ended over R15/$, despite the recovery.

But the end of the week has started to provide some clarity to the wave counts...

So let's get into the review, before we get into where we see us heading into this new week.

It was a most interesting week, with lots of major events and headlines. Here are some of the biggest ones from the last 5 days:

• ANC & Mboweni economic plans - some relief for the Rand as the tabled ideas from Mboweni seem to have been taken onboard by the ANC.
• Eskom & Moody's - the time is ticking toward Moody's review, and Eskom has already been further downgraded.
• US Economy major downturn - manufacturing and ADP private sector data are down...is the next recession starting?
• Trade War - rumours around Chinese companies being delisted from US stock exchanges rattled the markets

As far as the Rand goes, it had a really bad start to the week, losing ground immediately to trade over R15.20, as markets were startled by a report that the US is considering delisting Chinese companies from the US stock exchanges.

The US Treasury has subsequently denied these rumours, but the volatility continued to wobble markets globally...

Chinese PMI out on Monday morning showed a 5th month of contraction but was better than initially forecast. While the US has suffered from the Trade War, it is clear that China is doing so more, and the US has the resources to last out longer. However, a US recession or severe economic downturn would possibly change this advantage that is there over China. Hopefully the mid-October talks result in some some clarity for the markets. Interesting times...

And things became even more interesting as US Economic Figures came out during the week:

• The US ISM (Institute of Supply Management) manufacturing index fell to 47.8, the worst figure in more than 10 years. Although not recession numbers, the indicator clearly shows at least a slowing in the world’s largest economy.
• Non-Farm Payrolls came through on Friday at 136k, below the expected 145k - Dollar negative.
• Despite this, the unemployment rate dropped to a 50 year low of just 3.5%!
• The Trade Balance came through slightly narrower than June, but the gap with China surged to a 6 month high - surely much to the chagrin of President Trump

South Africa also had a some big economic figures:

• The South African balance of trade figure for August was released and we saw the trade deficit of R3.72 billion from July turn around to a R6.84 billion surplus. The majority of the turnaround came from a rise in mineral exports leading to a short-term rally for the Rand.
• The manufacturing slump continued, as local figures also fell to a 10-year low.

As the week went on, the Rand weakened in the midst of all this news, not enjoying the volatility surrounding emerging markets as it hit R15.39 on Wednesday morning, with many investors and importers starting to despair...

...and exporters starting to become overconfident and complacent...

...and as so often happens, when it feels things can only get worse (or better), the trend changes.

Fortunately, our mid-week update was soon to be published, which would give an outlook for the balance of the week and beyond.

But, firstly, before we share that, in other news:

• Finance Minister Tito Mboweni’s economic reform proposal (which highlights strategies to rescue Eskom) seems to have been taken on-board by the ANC NEC. A very similar proposal was put forward by the NEC for an economic recovery and Cyril Ramaphosa has promised that the government will finalise a clear strategy to tackle the country’s economic growth problems. But, it is worth noting that this plan has a very similar color to the 2011 National Development Plan - little of which has been implemented to this date.
• Which brings us to the SOEs, namely Eskom. Mboweni continues to try dig it out of a hole, but warned the ANC that "Eskom is not a bank" as he prepared a funding plan to try and return the stability of the entity. The importance of Eskom surviving cannot be overestimated, as just this analysis from SARB shows just how much damage load shedding does to the country. You can well understand Mboweni's determination to stick to his plan to sell the state-owned companies when these facts come clearer. If Eskom were to fail, it would be a total disaster.
• But ratings agencies are running out of patience and time. Fitch Ratings has now downgraded Eskom a further notch, signaling the utility's worsening ability to repay debt without additional government support.
• And on the subject of credit rating agencies, we are now 1 month or so away from SA's next review from Moody's, the last standing agency who has kept investment grade status for SA. General indications from Moody's have been positive, but investors are taking no chances. At the end of August, overseas ownership of SA government debt fell to 37% from 43% in March 2018. This is now its lowest level since February 2017!

But to get back to our mid-week update.

Wednesday had seen the market hit close to 15.40 (just 10c off the worst levels this year), with many thinking it MUST go higher now.

By the time this was published around NY close, the market had slightly from its peak earlier in the day, but there was still a lot of nervousness around...

And contrary to general expectations, our analysis showed something very different - that the market had likely topped out and was expected to head below 15.05 over the next few days.

Click to enlarge

And that is exactly what it did!

The Rand pushed steadily stronger over the next couple of days, and by Friday, we had seen the market drag itself down sub R15.20/$ by the time it was due for the big trigger event of the week: US Non-Farm Payrolls...

...notoriously the biggest trigger of the month in the forex market.

And. once again, the event didn't disappoint, as the Rand took the opportunity (on the back of the slightly weaker results than forecast) to push sharply stronger to touch as low as R15.02...

...exactly as we had forecast on Wednesday evening!

And so, a great finish to the week from the Rand, as it clawed back all it had lost, earlier in the week - plus some!

As we head into the second week of October, what does the market hold in store?

There are few economic events that could provide triggers, but no real big ones:

• Fed Chair Powell speeches (and Trump's response of course)
• FOMC Minutes
• BoE Governor speech

The big question is of course - can the Rand extend its gains that it made from the extreme of last week?

Based on our latest analysis, the answer is a likely yes, BUT it is not going to be one-way traffic. And we will need to see certain levels broken to confirm a larger degree reversal.

To get a look at what we are speaking about, use the link below to get access to our forecasts for the next 14 days.

No card needed. Gratis!

(You don't want to regret not having done so this time next week...)

Look forward to hearing from you.

To your success~

James Paynter