David Gracey

• Silicon Valley Bank – it’s a story as old as banking. Borrow short term, and lend long term.
• Because yield curves are “normally’ positive it’s a no brainer, until interest rates start rising and your short term liabilities cost more than you are earning on your long term assets. Et Voila your NAV goes into the red and your depositors, those that can get their money out early, run for the hills as the Emperor is the only one found not wearing any clothes at the fancy dress party.
• Regulators have spent decades trying to address this Banking short coming. Except of course, SVB was not regulated in the same way that main street banks are regulated, because they are “Special” or “different”.
• Anyway, the fallout has been swift as the market tried to figure out who’s next?
• Us treasury yields fell over 50 basis points, equities collapsed, gold rallied hard, and the currency markets were thrown into turmoil. Most currencies – EXCEPT THE MIGHTY RAND.
• What? You might ask? – the rand didn’t take flight, how can that be? It is one of the most vulnerable currencies out there given our fragile economy and enormous domestic problems.
• And the answer is somewhat technical.
• You see, none of our domestic fundamentals have changed. However, because of our domestic frailties, large negative positions had been built up in ZAR/EM crosses. For example, Investors who want to bet against the Rand will often do so against other high yielding EM currencies. In this way, they still earn higher yields in the currencies that they buy, whilst paying a high interest rate for shorting the Rand.
• And so in the last few weeks, long positions were taken in currencies like the Mexican Peso and short positions in ZAR. This positioning pushed the Rand through parity with the Peso after the rand had spent decades trading stronger than its Mexican counterpart. (see attached chart)
• But because of Mexico’s proximity to the US banking system, when SVB failed it frightened these position holders and it all unraveled in a few short days.
• As I said, this is all rather technical, but for clarity – Investors had to sell their long MXN positions resulting in the Mexican Peso weakening by close to 8% against the USD, whilst the Rand managed to maintain its poise because these self same position holders had to buy back their ZAR resulting in the Rand holding its “value” against the USD when everything else was falling apart.
• This demonstrates some of the vagaries of the Currency world, and it's one of the reasons why forecasting currencies in the short term is so damn difficult. You just never know what factors are going to push currency values around.
• Does this mean that the ZAR is out of the woods? Absolutely not!!! It remains vulnerable simply because our domestic fundamentals are so very poor.
• A very small example of our vulnerabilities is demonstrated in next weeks “National Shut Down” call by the EFF – they of the Red Berets and Economic Disastrous policies.
• They have called for a National Stay away to demonstrate against loadshedding and to call for the Resignation of the President.
• To be clear – I do think we as citizens should be far more vocal against our politicians,  and Eskoms performance. But given the EFF’s propensity for violent behavior, the chances are good that this stay away – if heeded – could turn quite nasty. Usher in Scenes from the July 2020 riots.
• It could of course all be a storm in a tea cup – there is a public holiday on the 21^st, and thus many folks may simply use the 20^th as an excuse for a long weekend.
• The point being, you just never know in our beloved country – things remain very fluid and fickle.
• Don’t be confused as to why the Rand has remained relatively stable when all the world seems to be falling apart. But do be aware of the associated risks. As Mexican peso buyers found out, these risks materialize often without warning.
• Good luck.

Source: Bloomberg