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Global financial markets are in a risk-off phase on fears of a severe slowdown in world economic growth, potentially to the point of recession, causing investors to sell off risky portfolio assets from mid-April.
The rand has run weaker for over a month, when it left the R14.00/USD to R15.00/USD range in April, running closer to R16.00/USD, although benefitting recently from the S&P positive outlook for SA’s credit ratings on domestic factors, allowing the domestic currency to track back to R15.65/USD.
A widening interest rate differential between SA and US interest rates would place the rand at greater risk of depreciation than has already occurred
However, globally the outlook has not improved, and the IMF warns that the world’s economy faces “the biggest test since the second world war.”
“The global economic outlook has darkened in the month since the IMF downgraded its 2022 growth outlook because of the war in Ukraine, China's slowdown, and global price shocks, particularly for food”.
A global recession is not seen as the central case, but the IMF added that it cannot be ruled out, which is adding to the negative sentiment. The IMF also recommends that “the Fed must continue to tighten monetary policy to get control of a surging inflation rate in the US” and that “it’s very important for the Fed to rein in inflation as soon as possible”.
Increased global financial market risk aversion has been generated by expected significantly tighter financial conditions, in the face of high inflation, driving fears of weakened world growth.
The IMF adds, “inflation in the US is broad-based.”
“This is not all a supply story. There is an important demand component to it.”
The US “should not take their eye off the ball.” A widening interest rate differential between SA and US interest rates would place the rand at greater risk of depreciation than has already occurred, which in turn would place pressure on SA’s inflation outcomes.
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About the author
Chief Economist of Investec Ltd
Annabel holds an MCom Cum Laude (Economics and econometrics) and has worked in the macroeconomic, risk, financial market and econometric fields, among others, for around 25 years. Working in the economic field at Investec, Annabel heads up a team, which focusses on the macroeconomic, financial market and global impact on the domestic environment. She authors a wide range of in-house and external articles published both abroad and in South Africa.
PREVIOUS RAND UPDATES:
Rand note: Q2 is a higher volatility period
9 May 2022
The second and third quarters of the year tend to be higher volatility periods for the rand
Global financial markets have turned more severely risk off, driven by a number of factors, but chiefly that the typical risk averse period of the middle two quarters of the year (northern hemisphere summer period) coincides with the severe tightening cycle of the US.
Global growth concerns have come to the fore, not just the effects of the severe interest rate hikes in the US, on both US and global growth, but also the surge in COVID-19 infections in China, and resultant lockdowns, and the increase in sanctions against Russia.
The annual sell (risk assets)-in-May and-go-away (typically from risk asset trading) has exacerbated market sensitivity (typically increasingly thinner trading over Q2 and Q3), and the rand has increasingly weakened since the second half of April.
Foreigners have been net sellers of SA equities, of -R26.7bn, respectively (net of purchases) from the second half of April to date (JSE trading data), which has weighed on the rand, while settled data shows only R2.8bn in net bond purchases (Bloomberg and the JSE).
The JSE has dropped to 67 978, from 78 297 in March, while the MSCI emerging market bond index has tracked down since early April after some strength earlier in Q1.22, and then recovery in March from the impact of the start of the Russian/Ukraine conflict.
However, foreigners are substantial sellers of EM portfolio assets, particularly China, and this has caught up with the rand too over April. Commodity prices fell over April, also subduing the rand, particularly for metals prices.
Resource counters too cooled over the period, with this section of the JSE instrumental in its overall moderation. Coal prices are still elevated, a key export but SA is facing huge challenges meeting export demand, and stockpiles are growing for bulk exports.
Indeed, rail deterioration has seen Transnet cancel long-term railing agreements for coal exporters reportedly under force majeure as the entity has been unable to overcome the damage from cable theft, inability to obtain locomotive spare parts and other issues.
The April floods in KZN will also have damaged the currency’s performance as it hit exports in that province, and in general foreign investors sentiment towards SA has been dulling. The rand has disassociated from the strong EM currencies’ pack it was in earlier in the year.
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Rand weakens ahead of FOMC
3 May 2022
The rand has weakened substantially on concerns over the size, and pace of Federal Open Market Committee (FOMC) interest rate hikes in the US
So far this quarter, the rand averages R15.08/USD, weakening substantially over the second half of April as markets increasingly worried that the US would hike its interest rates significantly more than SA in Q2.22, and H2.22.
Tomorrow night’s (SA time) FOMC meeting will be a key determinate for the domestic currency, with a 50bp hike in US interest rates factored in by the markets, although there are some worries of a 75bp hike instead, which have driven the rand particularly weaker recently.
While a 50bp lift is most likely, the FOMC sees another meeting next month (June) to asses, and change, monetary policy yet again, and markets have factored in another 50bp hike in June, and indeed two more at the FOMC’s July and September meetings, a 2% lift in total.
SA in comparison only has three monetary policy meetings in the period, and markets do not expect the same trajectory of rate hikes, with just under a 50bp hike in the repo rate anticipated this month (88% chance of a 50bp hike.)
In fact, financial markets have fully factored in a 250bp hike in the fed funds rate by year end, while in SA just under a 2.00% hike in the repo rate is expected from here this year, less than that of the US which would narrow the differential between SA and US interest rates.
Such an outcome typically results in rand weakness, and the rand is likely factoring this in ahead of time. Additionally however, a 2.00% lift in SA’s repo rate in the remainder of this year would be negative for economic growth.
Commodity prices have moderated, and are expected to drop further as global economic growth expectations have weakened for 2022, and the coal price (SA’s leading export this year) is significantly lower than two weeks ago.
The second half of April also saw a negative impact to SA’s trade balance from the extreme floods in KZN and disruptions to exports, which would have had a negative effect on the rand, at the same time as the market concerns over FOMC hawkishness elevated.
The sell-in-May and-go-away adage for financial markets refers to the advent of the Northern hemisphere summer vacation period, and also adds to risk aversion and so typically some EM currency weakness, along with other perceived risk assets.
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Rand weakens as tide goes out
25 April 2022
Marked rand weakness as official global growth outlooks deteriorate, pushing the rand back over R15.00/USD
Emerging markets across the board have tumbled over the past couple of weeks on a number of factors, including the increasingly hawkish commentary from the Federal Reserve Bank, with the exception of Russia’s ruble, which is receiving support from its government.
The domestic currency is over a rand weaker, having given up trying to remain below R14.50/USD after the first half of the month and now instead is running closer to R15.50/USD as May, and the traditional seasonal higher risk averse period, approaches.
The negative impact to SA’s trade balance over April from the extreme floods in KZN and disruptions to exports, will have had a particularly negative effect on the domestic currency, along with lower commodity prices. The large trade surplus has been a key rand support.
Q2.22 is likely to continue to see the rand removed from the R14.50/USD mark, with April so far on average recording R14.84/USD, and likely to average close to R15.00/USD for the month as a whole as most commodity prices prove weaker in Q2.22 than in Q1.22.
Global growth is expected to be weaker this year than was initially expected in January on the effects of the Russian/Ukraine conflict, severe lockdowns in China and stringent US monetary policy normalisation path dim economic prospects, and those for commodity prices.
Both the World Bank, and the IMF have cut their global growth forecasts, by close to 1% y/y for 2022, with the World Bank warning last week that “clouds have gathered over the economic horizon, which will mean lower economic growth and higher poverty.”
The IMF, also at the start of last week, bleakly said “global economic prospects have worsened significantly since our last World Economic Outlook forecast in January. Overall risks to economic prospects have risen sharply”.
Both multilaterals also expect slower global growth in 2023 than was previously forecast, with the IMF worrying “(t)he economic effects of the war are spreading far and wide—like seismic waves that emanate from the epicenter of an earthquake”.
With a gloomy start to the post Easter week for markets the rand has weakened materially, although it will likely stabilise into month end once markets have digested the recent slew of risks. Currently, we still expect the rand to average R15.20/USD this quarter.
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Rand remains amongst the best performing EMs
12 April 2022
Less volatility likely this year, and over the medium-term (expected case) than in the last few years
The rand remains one of the leading EM currencies, both since the start of the year, and over the past twelve months, benefiting from the differentiation between commodity exporters and importers, early and late cycle rate hikers, credit rating metrics and foreign portfolio flows.
The rand continues to be rebuffed from sustainably piercing the key resistance level of R14.50/USD, with the domestic currency relatively stable otherwise, trading between R14.53 and R14.82/USD this month, having only briefly pierced R14.50/USD at the end of March.
The rand’s strengthening trend since the start of last year has stalled at the major level, mainly afflicted by the moderation in commodity prices over the last month, but has not lost much support and is showing a degree of relative stability, which is positive for Q2.22.
Q2.22 is currently likely to see the rand slip further away from R14.50/USD, on average recording around R14.95/USD, as most commodity prices wane further over the second quarter, although this is also likely to be uneven as some commodities lead others.
Commodity prices are not expected to collapse outright in the second quarter however (base case), and so the rand should avoid severe volatility, instead likely moving towards R14.70/USD mid-month, and towards R14.80/USD around month end.
The probability of this expected case at 51% runs against a downside, of 46% (lite and severe down case probabilities), with the lite down case probability reducing this year so far as the credit rating agencies became noticeably less negative against SA.
With the Russian/Ukraine conflict waxing and waning, and SA well removed from any credit rating upgrades yet on a number of weak fundamentals for economic growth, the rand is still at risk of severe weakness (even if less so after the removal often negative rating outlooks).
There is uncertainty consequently too, but we nevertheless expected less rand volatility this year (see expected case forecasts) than last year, and certainly the year before, and over the medium-term as the slow progress of the repair of SA’s state productive capacity persists.
This week US inflation will be in focus, with CPI tomorrow and PPI Wednesday, likely to reflect early March and late February commodity price highs, although we continue to expect Q2.22 will see US inflation moderate on base effects, and more modest commodity prices.
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Rand note: downside risks decline on commodity rally and improved debt forecasts
4 April 2022
Prospects for the rand at highest confidence levels since Ramaphoria
The commodity rally has bolstered South Africa's economic outlook with the rand proving to be one of the most resilient emerging market currencies this week. These improved domestic metrics have upped the probability of an expected base case playing out in the country by 3% YoY to 51% on Investec's list of possible economic scenarios; while the potential for the lite down scenario has fallen from 44% in Q1 2021 to 40% in Q1 2022.
The last time the divergence between the two scenarios was so great was in 2018 on the back of Ramaphoria, and the last time the expected (base) case was at or above 50% was in 2013.
Investec's economic scenarios range from an extreme up case (1%) to an up case (2%), a base case (51%), a lite down case (40%) and a severe down case (6%).
What is the expected (base) case for the South African economy?
- Recovery from the sharp global economic slowdown by 2024 in real terms: global and domestic monetary and other policies support growth in financial markets; risk sentiment is neutral to positive.
- Exproproation of private sector property is limited and does not have a negative impact on the South African economy or on market sentiment.
- SA remains in the BB category rating bracket thanks to fiscal consolidation (debt to GDP stabilisation).
- Civil and political unrest wanes.
- Inflation impacted by normal course of weather patterns via food price inflation
- Modest transition to renewable energy and slow move away from fossil fuel useage. Measures to alleviate the impact of climate change on the economy are modestly implemented.
South Africa has seen a recent halt in credit downgrades, with both Fitch and Moody’s removing the negative outlooks on SA’s credit ratings in place since 2021.
Fitch removed its negative outlook in December last year, citing “strong fiscal performance … and significant improvements to key GDP-based credit metrics following the re-basing of national accounts... A major re-basing of national accounts has meant that 2020 nominal GDP was 11% higher than previously reported, affecting key credit metrics including GDP per capita and government debt/GDP, which for FY20/21 now stands at 72.2% rather than 81%... Fiscal indicators have also improved, supported by the economic recovery. The strong deficit reduction (is) well above earlier expectations, driven in part by a surge in commodity prices“.
Fitch does not publish a calendar of its country review dates for SA.
In addition to the factors highlighted by Fitch, Moody’s noted that, over the past two fiscal years, government re-prioritised its spending, demonstrating commitment to fiscal consolidation, which the rating agency expects will remain the case.
Moody’s can change/affirm ratings/outlooks at or between scheduled dates, or not at all.
Investec's economic scenarios explained
What is the lite (domestic) down case?
- The international environment (including risk sentiment) is that of the base case.
- South Africa fails to see its debt projections stabilise and falls into single B credit ratings from all three agencies for local and foreign currency.
- Recession occurs.
- Very limited expropriation of private commercial sector property without compensation, with some negative impact on the economy.
- Business confidence depresed, marked rand weakness and higher inflation (adverse weather), significant load shedding and weak investment growth.
- Substantial fiscal consolidation ultimately occurs, preventing ratings falling into the C grades.
The characteristics of the lite down include failure to stabilise debt projections and a resultant fall into single B credit ratings from all three agencies for both local and foreign currency debt. SA has not received any upgrades yet, or positive outlooks.
The credit rating agencies still highlight risks, which could see downgrades for SA, including weak growth and the need for additional SOE financial support.
Nevertheless, the longer SA maintains its lowered debt and deficit projections (or lowers them further), the further the lite down case’s probability could drop, strengthening support for the rand. But this also depends on commodity prices and factors affecting EMs.
Rand one of the most resilient emerging market currencies
The rand has shown reduced volatility this year in comparison to other emerging market currencies, and this is also likely reflective of its somewhat reduced credit risk as markets perceive a lower risk of default.
The recent temporary respite in fuel prices, as the state cuts the general fuel levy from Wednesday in the face of an incoming price hike of around R1.80/litre otherwise, also shows some improved flexibility and governance of the state, which is market cheering.
The heavy handed approach in 2020 of the command council’s response to Covid-19 unnecessarily damaged the economy, causing the loss of around 2 million jobs. While 2021’s 11% revision to GDP rapidly aided economic recovery, it did not solve the job loss.
A policy response more in tune with the economy, financial markets and investor confidence, as Minister Enoch Godongwana is displaying, is benefiting SA and the rand, allowing for differentiation in SA’s favour between EM currencies, which is appreciated by the rating agencies.
South Africa saw the official stats for Q1.22 record R4.9bn in foreign purchases of SA bonds (net of sales), with this capital inflow a strong beneficiary for the rand, and this final settled transactions data from the JSE reflecting general appetite through the quarter.
Rand somewhat buffered from impact of US interest rate woes
The US saw its core PCE come out lower than expected, at 5.4% y/y instead of at 5.5% y/y, the FOMC’s preferred measure of household expenditure price inflation, and this will have benefited market sentiment slightly. US CPI and PPI are due around mid-month.
Concerns are circulating on the severity of US interest rate expectations and the attendant increasing risk for a US recession, while the Russian/Ukraine conflict persists. However, in SA the improving credit metrics have come at a good time to add a buffer for the rand.
Moody's adds that it “expects that the government will continue to pursue its fiscal consolidation strategy. In the meantime, tax compliance is likely to improve gradually as the South African Revenue Agency (SARS) rebuilds some of its intuitional capacity”.
SA’s expected case probability of no downgrades has increased, and reflects a more certain environment for SA’s state finances, although reforms to the onerous regulatory burden and polices impeding free market dynamics which are urgently needed to bolster growth.
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Further rate hikes likely to follow Fed's hawkish comments
22 March 2022
The rand has appreciated over the past few days, buoyed by the strength of the FOMC reading on the US economy
The appreciation of the rand over the past few days is a reflection on the FOMC's bullish reading on the US economy. Indeed, the currency may have fared even better were it not for expectations that the war in Eastern Europe is likely to be a protracted one.
Currencies have differentiated on the basis of the expected growth impacts from the Russian/Ukraine war, with the Euro -2.93% weaker since the start of the year, and the Swedish krona, British pound, Danish krone down -4.1%, -2.60% and -2.96% in the period.
In contrast, commodity exporters have seen currency gains, with the Norwegian krone and Australian, New Zealand and Canadian dollars stronger by 0.86%, 1.12%, 1.28% and 2.71% respectively since the start of this year.
The rand, by comparison, is 6.13% stronger since the start of this year, benefiting also from the higher interest rate expectations for 2022, with South Africa’s Forward Rate Agreement (FRA) curve continuing to price in a 2.00% increase by the end of 2022.
South Africa’s bond yields are around 50bp higher than before the start of the war in Eastern Europe, which has benefited portfolio inflows. Foreigners bought R2.9bn worth of SA bonds in the last two days, net of sales, pushing the rand towards R14.80/USD. Iress JSE data also recorded net purchases of -R19.6bn for equities since the war began.
The rand is currently averaging R15.29/USD this quarter, frquently dropping below R14.90/USD in the last few days, driven by improved market sentiment to SA as risk aversion remains differentiated across emerging market currencies.
Talks between Russia and the Ukraine have so far failed to reach a permanent ceasefire and countries with geographical proximity to the conflict are likely to see their currencies negatively impacted for as long as the outcome hangs in the balance.
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Rand finds continuing support from elevated commodity prices
14 March 2022
The currency is also benefitting from an expected rate hike. But the spectre of stagflation looms large.
Since the start of the Russia/Ukraine war, the rand has strengthened against majopr currencies. The currency is currently trading at R16.38/EUR and R19.60/GBP, compared to R17.12/EUR and R20.52/GBP prior to the breakout of hostilities. It has also held firm aagainst the US dollar.
Not only have commodity exports benefited from elevated commodity prices, but SA bond yields have also risen by about 50bp since the conflict broke out.
Markets continue to price in substantial interest rate hike expectations. Concerns about local and global inflation have only intensified as supply cuts from Russia and the Ukraine drive a rapid acceleration in commodity prices. Heavy commodity exporters like those in SA, who are geographically removed from the war, are finding favour. But markets are now increasingly worried by the prospect of stagflation (high inflation, lower growth).
Foreigners have bought R15.5bn worth of SA bonds, net of sales, since the 24th February (Iress JSE data), with the same data source showing net foreign sales of SA bonds of -R44.7bn, although bond settlement data from the JSE reduces this to -R10.5bn (Bloomberg).
The -R10.5bn outflow is settled bond data, and so is regarded by the JSE as an indication of capital flows, whereas the daily data on bond trading refers to reported transactions (viewed as a liquidity indicator), but includes unsettled trades as well as rollovers, inflating the data.
For metals and minerals prices, the March reading is so far up 40% y/y (Economist commodity price index), on an already elevated period, driven substantially higher by aluminum, coal, iron ore and particularly nickel, while precious metals are also benefitting.
So too, maize prices are substantially up on the year, by 26% y/y, a key export for SA, while SA sees substantial sunflower seed imports from Botswana, and soybean imports from Zambia, with about half this amount again from Malawi and Zimbabwe (SAGIS data).
The rand is averaging close to R15.35/USD this quarter, attempting the R15.00/USD key resistance level a few times in the past two and a half weeks, driven by improved market sentiment to SA as risk aversion has differentiated across emerging markets.
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Markets begin considering a lengthier Russian/Ukraine war
7 March 2022
Commodity prices soar, but markets are also not yet anticipating a deterioration to WWIII
As South Africa heads towards the middle of March, and then on to completing Q1.22, the rand so far averages R15.35/USD, supported by commodity prices as markets have viewed the Russian/Ukraine conflict as more of a supply disruption than a severe threat to global growth.
Currently the rand is at R15.37/USD, and we still expect R15.40/USD as the quarter average, although the domestic currency is at risk of weakness in the remainder of this month – for as long as the Russian invasion of the Ukraine continues, and worsens.
Markets are now worrying that the Russian/Ukraine war will persist substantially longer than the quick conflict originally anticipated, and a lengthy invasion will have more severe effects on the global supply chain and so commodity prices, but WWIII is not yet expected.
Sanctions are deepening, with global discussions now on banning/limiting imports of Russian fuels, and the Brent crude oil price spiking to US$128.7/bbl and at risk of reaching US150/bbl. Strategic oil reserves have been released into the markets already to attempt to quell the price pressure.
The Western response has been substantial, coordinated and committed, while Russia has been unwavering in its objectives for the Ukraine. Hope persists for a resolution, but it is not likely going to be easy, or necessarily quick and markets are beginning to reflect this.
Financial markets have seen also some jitters as the US currently continues with its plans to hike interest rates (with a 25bp hike next week), but the rand remains among the top five EM currencies in terms of performance, both from the start of the year and on a year ago.
However, US treasuries’ yields have subsided, with the benchmark ten year now at 1.72% from 1.88%, as markets now worry over a worsening of the war in Eastern Europe, and so financial market instability, leading to less likelihood of a marked interest rate hike cycle.
Should the tensions with Russia and Western countries escalate further and cause marked financial market instability, the US may delay its interest rate hike next week. It would likely add in supportive measures if markets near a crisis (not the expected case).
A high proportion of SA’s fuel prices are government levies, and temporarily removing these would reduce a sudden extreme fuel price jump, while state support to combat the effects of food spikes such as bread prices on rapid wheat price escalations would also be necessary.
Watch video: Could SA's PETROL price hit R40 a litre?
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Rand weakness reflects uncertainty about Russia/Ukraine war
1 March 2022
As the conflict intensifies, global risk-off sentiment is hurting the local currency.
After a recent weak point on Thursday last week of R15.53/USD when the Russian/Ukraine war began, the rand has pulled back slightly. Despite substantial financial, humanitarian and military equipment aid to the Ukraine, the conflict has not widened to include any other countries.
Severe and broad-based sanctions imposed by most Western countries on Russia have seen the rouble weaken by -24.4% to date since the start of the year, while the Ukrainian Hryvnia is -7.3% weaker over the same period.
This morning, the rand was just -1.9% weaker since the start of January. This was an improvment on yesterday’s -2.45% depreciation in the comparable period, as risk aversion eased somewhat, with talks on a possible ceasefire underway between Russia and the Ukraine.
The rand even broke through R15.30/USD level, reaching at R15.25/USD, as markets hoped for resolution on the conflict. But Ukraine was not optimistic on a ceasefire and Russian forces were reported to have continued their attacks during the talks.
The EU, Britain and other Western allies have instituted broad sanctions and export controls of military equipment to Russia so far. These include sanctions against Russian companies, business leaders, government officials and banks.
China has not indicated that it will increase imports of Russian goods to fully counteract the impact from sanctions, and instead is particularly concerned about its reported US$1.6trillion in trade with the EU and US. China’s trade with Russia is estimated only at US$0.1trillion.
China buys mainly oil and gas from Russia, and has been keen to buy more. It is also reported to be increasing wheat imports from Russia. The oil price reached US$103/bbl today and is likely to climb further on an intensification of conflict, bolstering inflationary concerns.
Around midday today it was reported that Russia is set to intensify its attack. A long convoy of vehicles is en route to encircle Kyiv, while missiles have struck Kharkiv (Ukraine’s second-largest city).
There is no end in sight for the Russian/Ukraine war will end, and it's uncertain how much more it will intensify. Russia is unlikely to back down easily: a much harsher second wave of attack looks more probable. As a result, the rand is at risk of further weakness this month.
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The weakness of SA economy is eventually likely to catch up with its currency
21 February 2022
The rand continues firmer on the commodity surge, further bolstered by geographical distance from Russian/Ukraine tensions, seasonal risk-on strength and the fading pandemic.
As tensions escalate in the Ukraine, with Putin unlikely to back down easily or permanently, the rand is holding onto recent gains.
An actual third world war is not anticipated, despite key nations entering the fray with targeted economic sanctions, if not large-scale troop deployments.
In South Africa, the Budget this week is not expected to offer much in the way of lowered fiscal projections, let alone fiscal consolidation back to pre-pandemic levels in the near term. And it's worth noting that fiscal health was a serious concern for the economy even before the pandemic.
South African rand bonds continue to attract investors with high yields. Should Minister Godongwana rebuff sceptics and announce a further lowering in debt and deficit projections, this would add to positive sentiment towards South Africa's debt and the ZAR.
In any event, no credit rating upgrades are expected as a result of the budget. The best we can hope for is that Moody’s considers removing its negative outlook should the budget be positive. The rating agency is set to meet on 1st April and 18th November this year to potentially deliver a credit rating action. S&P’s dates are 20th May and 18th November for this year. Fitch does not publish dates for South Africa’s credit action, but tends to show a similar pattern.
The credit primary objective of the credit ratings agencies in assessing a sovereign/entity’s credit worthiness is to assess the likelihood of repayment of debt. As such, we can only expect to see credit rating upgrades from any of the key ratings agencies once SA is able credibly to lower its projected debt trajectory to peak around the current ratio. Thid would be positive both for the rand and SA’s bonds.
However, the country's current economic fundamentals, weakened by the sluggish pace of structural reform, electricity supply constraints and high unemployment, are not consistent with such dramatic improvements in the debt trajectory.
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The rand continues to benefit from the resurge in the commodities boom, strengthening through R15.00/USD today
17 February 2022
Last year, the rand reached a strong point of R13.40/USD, R16.32/EUR and R18.96/GBP in June as the commodity cycle peaked, but weakened to R16.37/USD, R19.02/EUR and R21.77/GBP (December) as markets panicked over a likely rapid quickening in tapering and early interest rate hikes.
January saw the rand run back down from above R16.00/USD, to close to R15.00/USD, and February continued to attempt to pierce this key resistance level, successfully achieving this today at R14.91/USD, on the resumption of the commodity boom, after H2.21’s slowdown in commodity prices.
One of SA’s key exports, metal commodities’ prices, are tracking back towards the prices of Q2.21, and others such as agricultural food, and nonfood, commodity prices (all measured by Economist commodity indices) are at nine and ten year highs respectively.
Industrial commodities’ prices are also at ten-year highs currently, as the three categories exceeded their previous high price points in the current commodity cycle.
SA has been shielded from high oil prices as a consequence of its strong exports of other commodities, but would see further rand strength if it uses its own oil instead of heavily importing it.
South Africa’s terms of trade are reflective of bolstered commodity prices, and so export values, with February likely to record another good trade surplus, and quite possibly a budget surplus too, repeating December and June’s twin surpluses achievement.
Marked commodity price strength is occurring, despite the rapid quickening in US QE tapering and likely hike in the fed funds target rate in March, and indeed may well be aided by it, as markets see this as strong confidence from the FOMC on future US economic, and so global, growth and demand.
In turn, this would provide further demand for commodities, which are already seeing severe supply shortages on demand, rapidly drive up prices, in turn a positive environment for commodity currencies and exporters. International factors continue to drive the rand in the main.
The rand will remain volatile, at high risk of further substantial moves, but is also weakened by SA’s inflation rates remaining well above those of its key trading partners, the EU, US, UK and China on a long-term basis, despite short-term dislocation of this relationship in some areas.
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Rand note: high bond yields and improving fiscal metrics drive investor interest
14 February 2022
The rand continues to benefit from the beginning of the year’s seasonality, with high bond yields and improving fiscal metrics driving investor interest.
South Africa continues to see investor appetite, particularly on the domestic side for government debt, while the rand is performing well compared to other emerging market currencies, all against the US dollar.
Currently the domestic currency is 4.5% stronger since the start of the year. On a year on year (y/y) basis it is -3.6% weaker, but sits in the midst of the emerging market basket of currencies, all generally weakened by the US monetary policy normalisation process.
A year ago the rand was around R14.40/USD, but then weakened through March as the domestic currency experienced some usual seasonal patterns of weakness into the second quarter, although in the second quarter itself the domestic currency bucked this trend.
By June the rand had reached R13.40/USD, driven by the combined favourable global market sentiment and SA's strong trade performance, as SA’s markedly positive terms of trade (or the ratio of exports to imports) was lifted by strong commodity export prices.
The rand also benefitted from strong global growth expectations, which underpinned market sentiment, and so an investor risk-on environment, as global monetary and fiscal policies remained highly supportive for economic growth.
However, the third wave of Covid-19 infections, and political tensions as key figures attempted to escape prosecution for corruption, pushed the rand back above R14.00/USD by end June last year, as investor appetite into EM portfolio investments differentiated.
The rand then weakened on the radical destruction of economic activity and infrastructure in a number of areas in SA in July’s riots, reaching R15.00/USD briefly in July, and then was subsequently afflicted by market concerns over possible FOMC hawkishness.
That is, the remainder of 2021 and early 2022 saw the rand impacted by concerns over US QE tapering and interest rate hikes, with the global macro-economic environment for 2022 set to be the least supported by policy measures since the pandemic began.
The rand weakened beyond R16.00/USD by end 2021, pulling back in January on traditional increased risk appetite, but also on increased certainty on US monetary policy. The domestic currency is likely to remain volatile, unlikely to see substantial strength this year.
That does not mean commodity prices will collapse this year, far from it under the expected case. Instead, the rand has gained support from commodity prices, which should persist over H1.22, and into H2.22 although some moderation at times may occur as volatility persist.
This has counterbalanced quite a bit of the negative drag from the rapid US monetary policy normalisation process under way, with the rand continuing to attempt to near the R15.00/USD mark but not very assertively, while the Budget next week is not expected to upset it.
IRESS data shows foreigners bought R4.7bn worth of SA’s portfolio assets this year (bonds R2.0bn, equities R2.7bn) all net of sales, and this positive sentiment is also buoying the rand, with rand bond yields still offering high breakeven (inflation adjusted) rates.
Currently, SA’s 10-year breakeven inflation rate (market measure of expected inflation) is at 5.95%, still well above the US’s market measure of expected average inflation of 2.47% which jumped up from 2.4% earlier in the month as January’s US inflation print of 7.5% y/y shocked.
With the breakeven rates for both SA and the US in excess respectively of SA’s 3-6% target range with a midpoint of 4.5%, and the US implicit inflation target of 2%, markets are still stressed about future inflation outcomes, and in SA show less anchoring to the inflation target.
SA’s breakeven inflation rate in early February 2021 was 4.8% in comparison. While the current high breakeven rate appears out of line, SA’s high inflation rate at 5.9% is causing some concern, and translating immediately through into markets.
The JSE data on settled non-resident trades in South African bonds reported by Bloomberg, with data for cumulated periods adjusted for backdated spot trades (but includes cancelled trades), gives different results to the IRESS reported data from the JSE for daily trades.
Nevertheless, the Bloomberg data also shows net foreign inflows into South Africa’s bond market since the start of year, as foreigners increased bond holdings on a net basis (purchases net of sales), attracted by SA’s high yields, while fiscal metrics improve.
South Africa’s high yields are somewhat out of kilter with its improving, and projected improvements in its fiscal metrics since last year, with the yield on the ten year government bond still elevated above 9.00%, attractive to investors, but also with risks involved.
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Rand treading water ahead of Budget
7 February 2022
Commodities rally continues to support the Rand along with twin trade and budget surpluses.
The rand so far this quarter averages R15.46/USD as it approaches the mid-point, supported by strengthening terms of trade over Q4.21 and into 2022 as commodity prices strengthened, also boosting the main budget surplus, with SA recording twin surpluses in December.
Both the trade and budget balances however are subject to some seasonality too, depending on the festive period and vacation days for the trade account, and timing for tax payments. Commodity price strength has also boosted corporate tax revenues and exports recently.
South Africa is a key commodity exporter, particularly of metals such as iron and other ores, platinum, gold and also of ferro alloys and coal and agricultural prices have also seen substantial increases, and so SA’s exports have been boosted by these price rises.
Global economic data continues to show improving demand, albeit at a slower pace than last year’s heady acceleration, as the world’s economic recovery is seen to remain on track to reach its levels achieved before the pandemic already by this year.
South Africa continued to see trade surpluses last year far exceeding those of 2020, with the trade balance for the year as a whole at R441bn in 2021, versus R272bn in 2020, and South Africa’s terms of trade positive through the whole of 2021.
SA’s trade surplus improved from June 2020 when the harsh lockdown restrictions earlier in the quarter eased, with exports increasing in the main, stabilising the rand around R17.00/USD from May to over Q3.20, and then around the R16.00/USD over Q4.20.
By the end of 2020, the rand had reached R14.69/USD, with the trade balance recording some very hefty surpluses, of R30bn to R40bn a month over H2.20, as commodity prices staged a strong recovery from Q2.20’s lows, and the trade war.
2021 saw trade surpluses average close to R40bn a month, versus close to R20bn in 2020 (and R5bn since 2010). By Q1.21 the rand averaged R15.00/USD and Q2.21 closer to R14.00/USD, although H2.21’s rand weakened and so did SA’s terms of trade.
The recent gain in commodity prices has provided some support for the domestic currency but global PMIs have softened in SA’s key trading partners’ while supply chain disruptions and shortages persist, with the rand expected to be limited for substantial strength in H1.22.
South Africa’s budget surplus for December was also around R40bn, at R41.9bn. State revenues swelled to R212bn, with R93.7bn from corporate tax, R47.8bn from personal income tax and R46.8bn from taxes on goods and services (including VAT’s R32.9bn).
The largest revenue category, corporate tax is up 74% year to date for the 2021/22 fiscal year (over the low base of 2020/21 (April to December) established by the very harsh lockdown restrictions, but still up, by 55.6% on the same period for 2019/20.
For the fiscal year to date personal income tax collections are 14.9% higher on the same period in 2020/21 but only up 4.5% versus the same period of 2019/20, as the recovery is still modest for consumers in SA with many households not having recovered financially.
That is, the Transunion Consumer Pulse survey showed 55% of consumers’ incomes in Q4.21 were still negatively impacted by COVID-19 (versus Q1.21 62%). With inflation up 8.1% over the period this is unsurprising.
The fiscal deficit at R219.1bn for the first three quarters of 2021/22 (SA has only seen two months in fiscal surplus so far for 2021/22), with the main budget deficit estimated at -R410bn this year, the actual outcome is likely to be less, closer to -5.0% of GDP than -6.6%.
The Budget on 23rd February is however not expected to result in any upgrades in SA’s credit ratings, coming in neutral overall as revenue overruns are eaten up by higher expenditure, particularly further social support, and so is likely to be fairly rand neutral.
The SONA due this week Thursday 7pm is expected to show little difference in content to prior years, and there have been little new implementation of reforms sufficient to likely drive economic growth beyond 2.0% y/y this year, particularly on reducing the regulatory burden.
Moody’s this month warned that it is likely that South Africa’s “(m)acro-economic conditions will remain difficult, with sluggish economic growth, rising government debt and limited progress on economic reforms due to social and political obstacles.”
Adding that it “expects real GDP growth of just 1.8% in 2022 as political tensions and reform inertia have brought about exceptionally low business confidence. Labour-intensive sectors will continue to be hit hardest, with employment levels remaining weak.”
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Risk aversion rises on concerns about extreme rate hikes
31 January 2022
Fears that interest rates will be hiked aggressively both globally and domestically in response to rising inflation are resulting in concerns about the outlook for economic growth and could lead to increased market volatility.
The rand has weakened to R15.76/USD today. It is highly volatile on the deterioration in market sentiment as excessive interest rate hike cycles are being priced in, causing concerns about economic growth outlooks, and raising risk aversion levels.
The rand today mostly traded around R15.50/USD, at the expected average level for Q1.22 overall, but we expect to see ongoing volatility this quarter. Market expectations about interest rates are likely to eventually become more rational, but sensitivities remain elevated.
Foreigners are now sellers of SA markets year-to-date, dumping -R3.6 billion of SA equities (net of purchases), and -R5.5 billion worth of SA bonds (also on a net basis) in the last week alone. Foreign outflows from South African portfolio assets this year so far total -R3.0 billion.
Investors have been re-positioning for a higher global interest rate/lower economic growth environment. The fed funds futures (which indicate how the market expects Federal Reserve policy to change) currently price in a 1.25% overall hike in the fed funds target rate this year. This equates to a 25bp hike at virtually each monetary policy meeting (five out of seven).
Such a severe rate hike trajectory is seen as likely to be destructive for economic growth. Meanwhile, inflationary pressures in the US are expected to ease from Q2.22, meaning that markets could see further volatility as investors adjust their expectations once again.
The rand continues to be influenced by global markets, ignoring good news on the domestic front. For example, revenues are 34.4% higher year-on-year (y/y) for the first three quarters of the year 2021/2022 compared to the same period of 2020/2021. That said, the increase comes off a very low base given 2020/2021 was the period most affected by lockdown.
These main budget revenue figures show that 76.8% of planned revenue of R1.5 trillion has been collected so far, while only 71.8% of allocated expenditure has occurred. A significantly smaller deficit, of closer to 5.0% of GDP (versus -6.6%), is likely if this trend continues.
A quicker moderation in the fiscal deficit than the forecast provided in the November 2021 Medium Term Budget Policy Statement (MTBPS) would be positive for the rand. The higher revenue figures tie in with the improved transactions seen over December from BankservAfrica (see last Covid-19 note, email address below).
Data continues to show strengthening evidence that the SA economy is recovering from the effects of the pandemic, albeit not in full yet. Markets are worried about the impact of substantially higher global and domestic interest rates.
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Rand targets the major resistance level of R15.00/USD
24 January 2022
Having convincingly broken through R15.20/USD, the rand is riding a wave of positive market sentiment
The rand has reached R15.09/USD so far today, as it now targets the key resistance level of R15.00/USD, having convincingly broken through R15.20/USD, benefiting from risk-on sentiment in global financial markets, and from related commodity price strength.
Foreigners have been positive on SA markets so far this year, purchasing R5.8bn worth of SA bonds (net of sales), and R2.2bn in equities (also on a net basis) in the middle of last week. Overall foreign inflows into South African portfolio assets this year so far total R5.5bn.
This continues to support the rand’s strength, along with strengthening commodity prices, with the (Economist) index for metals prices up 4.6% m/m in January after December’s 9.6% y/y rise, as markets continue to anticipate robust global recovery.
The rand is likely benefiting from a trade surplus in January, as seasonally weak imports at the start of the year, and strengthening metals commodity prices from November, see the domestic currency gain against other currencies generally.
Overall commodity prices are up by 7.8% y/y, and food and non-food agricultural goods are 1.8% y/y and 28.9% y/y higher (also Economist commodity price indices), with SA also seeing substantial exports of agricultural food and nonfood goods.
Adding to positive market sentiment, Fitch has said that the credit rating outlook for emerging market economies (Ems) is improving, albeit with risks. “The emerging-market (EM) sovereign rating cycle has turned more positive with four upgrades... continuing economic revival after the pandemic, nascent fiscal recoveries and higher commodity prices add up to a moderately net improving or neutral macro credit environment for the main EM regions in 2022”.
The recent approval of a US$750million World Bank developmental policy loan (DPL) for SA to aid in relief for those negatively affected by the Covid-19 pandemic is seen as market positive. The loan does, however, come with currency risk despite the low funding cost.
Low levels of risk aversion on global financial markets tend to drive the domestic currency higher at the start of the year, and the rand could quite likely see further strength in Q1.22.
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Rand continues typical January strengthening
17 January 2022
The rand is consolidating now below R15.50/USD but likely to attempt R15.20/USD this month
The rand has reached R15.29/USD today, as it continues to attempt to gain the key resistance level of R15.20/USD, but is being firmly rebuffed from this major level. The domestic currency so far averages R15.67/USD for the first few weeks of this quarter.
Foreigners are positive overall on SA markets this year to date, purchasing R4.4bn of SA bonds (net of sales), and R1.2bn in equities (also on a net basis) in the middle of last week. Overall foreign inflows into South African portfolio assets this year so far total R3.0bn.
This has supported the rand’s strength, along with easing monetary policy in the world’s largest emerging market economy. China’s first cut in its key interest (one year loan) rate since April 2020, of 10bp, occurred as its economic growth slowed, lifting sentiment for EMs.
While the global monetary policy trend is for reducing accommodation, by tapering QE and hiking interest rates, China’s move has positively impacted global financial market sentiment further and is aimed at supporting economic growth in the world’s second largest economy.
China’s modest inflation, and concerns over its economic growth outlook on its property market’s weakness, and the negative impact of Omicron on its economic activity, has seen the emerging market cut interest rates, with further moves expected.
In contrast, the US is on a firm path to withdraw its easy monetary policy as its very high inflation environment worries policy makers, while its economy and labour markets have shown good recovery and are expected to make further gains.
Indeed, US CPI inflation may not have peaked at its current forty year high of 7.0% y/y, with Q1.22 at risk of a further lift. In contrast, China’s CPI inflation came out at 1.5% y/y in December, below November’s 2.3% y/y and the market’s expected 1.7% y/y.
Omicron has spread rapidly through China, with it maintaining a zero covid strategy which is feared to likely quell consumption growth contributions to Q1.22. Broader monetary easing is likely on rate cuts and a lowering in its reserve requirement ratio for banks.
However, China’s structural changes to its economy have seen more serious growth concerns than can be addressed with monetary easing, and provides some risk to the global growth outlook, along with overly harsh US rate hikes, with the rand likely to remain volatile this year.
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The rand is seeing typical seasonal January strength
10 January 2022
The rand strengthening to R15.57/USD but will likely remain volatile this year
Driven by a myriad of factors, the rand strengthened to R15.57/USD on Monday in its usual bout of seasonal strength. The currency is expected to average R15.50/USD this quarter, although risks of volatility and weakness remain.
Foreigners have been active in SA markets this year so far, purchasing R2.6bn worth of SA bonds (net of sales), and R0.7bn worth of equities (also on a net basis) in the middle of last week. Overall, foreigners sold only -R0.4bn worth of equities (net of purchases) this year.
Foreign inflows into South Africa’s portfolio assets this year so far stand at R2.2bn, which has bolstered the rand, and the favorable risk appetite is being driven by the usual increased seasonal risk taking of foreigners towards rand assets over the turn of the year.
The northern hemisphere winter typically sees increased investor interest in SA markets as most market players are at work compared to the thin market months in the northern hemisphere summer vacations.
Heightened risk taking typically occurs over the northern hemisphere winter versus the low risk taking in the northern hemisphere summer. Rand assets are often in particular favour given the high liquidity and sophistication of the domestic financial markets.
Consequently, the rand tends to strengthen in the first and last quarters of the year and weaken in the middle two quarters of the year and this seasonality particularly comes to the fore when other drivers of the domestic currency are more subdued.
The recent FOMC minutes and meeting of 15th December 2021 provided the markets with significantly more certainty on the US monetary policy normalisation process, and consequently has reduced risk aversion for markets.
With expected US rate hikes this year (the Fed fund futures are currently expecting up to three 25bp increases) and QE ending signalled as early as March, markets are relishing the increased certainty of the outlook, bolstering foreign investor portfolio flows into SA.
The rand consequently could strengthen through the R15.50/USD mark this month, potentially as early as this week, and moving towards R15.00/USD this quarter, if not stronger, although the domestic currency will also remain highly volatile.
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The rand is likely to run between R15.00/USD to R16/USD over 2022
8 December 2021
The rand is likely to remain volatile, weakening over the long-term as SA’s inflation rates remain well above those of its key trading partners
After briefly reaching R13.40/USD, R16.32/EUR and R18.96/GBP this year in early June, the rand weakened to R16.37/USD, R19.02/EUR and R21.77/GBP by December, as markets factored in higher US interest rates from next year.
Markets currently expect the Fed funds target rate will be hiked three times, by 25bp in each move, by early 2023. South Africa’s FRA (Forward Rate Agreement) curve has elevated sharply, anticipating that the repo rate will be about 2.00% higher by then, which is likely overdone.
However, interest rate expectations have been rising in SA as the SARB’s tone has proved particularly hawkish over the past few months, resulting in an early 25bp hike in the repo rate in November this year, with markets anticipating another lift in Q1.22 - which will likely occur.
The start of the normalisation of US monetary policy with QE tapering early in November would have been a key factor in spurring SA’s repo hike. US inflation is high, and markets expect a further rise on Friday in the CPI, to 6.8% y/y from October’s 6.2% y/y, which would lend support to pressure in the FOMC preferred measure of Inflation, the core PCE deflator.
The recent US jobs figures, while disappointing in the headline payrolls data, show on deeper analysis strengthening in some areas of the jobs market, and so lower unemployment. The Fed is likely on track for quickening the pace of QE tapering, which would provide an underpin for rand weakness into H1.22.
The US is unlikely to see a reduction in its pace of QE next year, despite the fourth wave of Covid-19 globally, and in the US, and indeed potential further waves of Covid-19, driven by new variants.
The US is powering ahead with further fiscal stimulus as it plans to continue to normalise monetary policy over 2022, and this will put pressure on SA to hike its interest rates further as the timing for US interest rate hikes approaches.
Foreign investor flows into emerging market assets have cooled, with most of the riskier jurisdictions losing out, particularly on fears of the fourth wave of Covid-19 infections, although risk sentiment has begun reversing this week as markets begin to digest the more modest impact of the Omicron variant on those infected than was feared.
The rand is likely to remain volatile, weakening over the long-term as SA’s inflation rates remain well above those of its key trading partners, the EU, US, UK and China, despite short-term dislocation of this relationship in some areas, although not to the rand’s benefit.
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The rand has continued to attempt to pull back
6 December 2021
Rand has strengthened to R15.93/USD as US nonfarm payrolls came in particularly weak, and SA sees a marked drop in new daily infections
The rand has strengthened to R15.93/USD so far today, but pierced below R16.00/USD on Friday as the domestic currency remains choppy, pulled in different directions by the very low US nonfarm payrolls numbers but with many still expecting a quickening in US QE tapering.
Versus the expected 550 thousand expansion in jobs, only 210 thousand new jobs were recorded on the November payroll system, as uncertainty around the impact on the economy of a quicker taper, and so sooner rate hikes, in the US afflicted the hiring figures.
The weakness represented by these jobs figures was broad-based across a number of sectors, with non-farm payrolls just under half a million jobs below the level before the pandemic. However, individuals continued to gain work, just not as quickly as anticipated.
Household employment, versus company and government above, saw 1.1million jobs gained and unemployment dropped to 4.2%, from 4.6%. Although household employment is volatile, and may slump early next year, markets were cheered by the lower unemployment rate.
However, there are still 2.4million individuals less in employment overall versus before the pandemic, despite the US labour force increasing by 549 000 individuals in November, going some way to easing labour shortages, but with a still relatively tight market.
The labour force participation rate is up, as are hourly earnings, the later higher by 0.3% , and this measure of wage inflation is up 4.8% y/y, signifying some upwards pressure from this source for November’s US CPI, with US CPI inflation at 6.2% y/y in October.
The divided data does signify a recovering jobs market (and aggregate labour income is reported 10.4% higher y/y), with the FOMC meeting on 15th December to decide on whether to quicken its tapering of its asset purchase programme.
The FOMC may well taper further, as both household savings and expenditure are fairly robust, and PCE is expected to remain healthy well into the first half of next year. Markets are still digesting the jobs data leading to further volatility for the ‘more risky’ risk assets.
The rand remains vulnerable, as while this time of year typically sees more market calm, the progress the US is making in the normalisation of its monetary policy is heavily disrupting it, although it would have likely been worse in the typically risk-off period for the rand of Q2/Q3.
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Rand recovers on President Ramaphosa's speech and Omnicrom hopes
29 November 2021
The rand strengthened to R16.07/USD following President Ramaphosa's speech and hopes that the Omicron variant may be less virulent than Delta.
The rand strengthened to R16.07/USD today, from R16.37/USD on Friday as news of the Omicron variant broke widely and travel bans were instituted against SA from many advanced economies on concern over the potential high contagion of the new variant Omicron.
However, Dr. Coetzee, chair of South African Medical Association and a member of the Ministerial Advisory Committee on Vaccine, noted very mild symptoms so far with the new variant, "which did not fit in the clinical picture" of the delta variant.
"The most predominant clinical complaint is severe fatigue for one or two days. With them, the headache and the body aches and pain." The Omicron variant is currently seen as potentially much milder than the delta variant, with patients able to be treated at home.
Omicron, first identified in Southern Africa, was declared a "variant of concern" on Friday by the World Health Organisation (WHO) and financial markets reacted negatively to the news. But today the knee-jerk reaction seemed to have subsided somewhat.
In last night’s address to the nation, President Ramaphosa confirmed that “if cases continue to climb, we can expect to enter a fourth wave of infections within the next few weeks, if not sooner.” Overall, he took a sensible approach, without any increase in lockdown levels.
The rand gained some cheer from the speech, with the President emphasising that we already have the tools that we need to protect ourselves against the new Omicron variant of Covid-19: mask-wearing, social distancing and vaccination.
“We are still not sure exactly how it will behave going forward," he added. “We know enough about the variant to know what we need to do to reduce transmission and to protect ourselves against severe disease and death.”
It's worth noting that the rand was already at close to R15.90/USD before the news of Omnicron's discovery broke widely, and the currency had breached R15.00/USD ahead of the FOMC meeting in early November on QE tapering expectations.
The rand is likely to remain highly volatile. Non-farm payrolls data out on Friday and a strong number will boost market expectations of quicker QE tapering, although the global increase in Covid-19 infections, particularly in the US, will be of FOMC concern.
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The rand fails to see much strength
22 November 2021
Rand remains mired weaker as the credit rating agencies leave SA's rating unchanged as expected but global factors continue to provide a drag on EM assets.
Risk classes continue to be heavily graduated, with EM assets losing out, particularly in the currency space while advanced economies continue to see gains particularly in equities, and this has benefited SA equity prices too, but the rand remains mired weaker.
Figures from Iress and the IFF (Institute of International Financial) show that -R29bn in bonds owned by foreigners were sold in November net of purchases, after a -R32bn on a net basis in October, and a loss of -R30bn in September.
Foreigners have also been dumping SA equities on a net basis according to the same figures, with -R9bn sold off in November, -R20bn in October and -R6bn in September (August -R11bn), and indeed each month recording a net sell-off this year.
The Fed QE tapering has added to negative foreigner investor perceptions of emerging markets. The MTBPS recently warranted no change in SA credit ratings from Moody’s and S&P, with no comment from Fitch either.
Moody's “completed the periodic review of a group of issuers that includes South Africa and may include related ratings through a discussion held on 14 October 2021. The review did not involve a rating committee, and this publication does not announce a credit rating action".
“The (existing) credit profile of South Africa (issuer rating Ba2) reflects the country's "baa3" economic strength, balancing deep-rooted structural impediments to growth against its deteriorating but still strong economic resiliency derived from economic diversification”.
Furthermore, “its "baa3" institutions and governance strength based on the country's robust ranking in the Worldwide Governance Indicators and evidence of the institutions' capacity to preserve macroeconomic stability”.
While “its "caa2" fiscal strength reflects the continued, long-standing rise in government debt levels and deteriorating debt affordability, and its "baa" susceptibility to event risk driven by political risk and banking sector risk.”
The rand currently averages R15.00/USD so far this quarter, with just over half the quarter reached. The ongoing negative market sentiment to EM’s risks further vulnerability for the domestic currency. Both Moody’s and Fitch have retained SA on negative rating outlooks.
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Rand strengthens as key global indicators improve
8 November 2021
The currency is benefiting from greater risk tolerance, but the prospect of an EFF ANC coalition could be a spoiler
The recent lift to R14.93/USD after a low of nearly R15.50 last week comes as recent improved US jobs numbers indicate further recovery in the US after the impact of the delta wave.
Seasonally, the last quarter of the year, and first quarter of the next, are often strong for risk assets, and the robust upward momentum in global equities is also improving risk-appetite further, with the rand potentially making additional gains this week.
However, both the medium-term budget policy statement (MTBPS) and some further signalling on political coalitions this week may have room to upset the domestic currency. In particuar, the market will be watching with concern as the ruling party mulls coalitions with the EFF in municipalities where it has not achieved a majority.
While Thursday's MTBPS is expected to bode well for further fiscal improvement, additional heavy expenditure commitments over the medium-term could counteract this, while increases in the projected rand value of borrowings would be market negative. Tax change announcements are unlikely, but the new finance minister is expected to provide clarity on inflation targeting policy, exchange controls and potential future taxation directions.
SARS has been making strong progress in a number of areas and the MTBPS should give detail on this and some upwards projected revenue adjustments - SA’s revenue GDP ratios otherwise risk dropping on the recent surveyed enlargement of the economy by Stats SA.
SA’s debt and budget deficit ratios, which we expect at 69.8% for gross loan debt and a deficit of -7.5%, both as a % of GDP, could both surprise on the lower side for this year, with potentially the budget deficit closer to 6.5%.
National Treasury will likely announce some plans of a form of more permanent financial assistance for the unemployed as the social relief grant wears out, with the potential permanent social transfer likely to be tied to job seeking as opposed to an outright grant.
The domestic currency could be in for a strengthening run this week and next if the budget figures surprise on the positive side leading into the country reviews on 19th November, where we expect no change, although much will depend on the ANC coalition partner/s.
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Rand has weakened in anticipation of the Federal Open Market Committee meeting
2 November 2021
Rand weakened, while oil exporting EMs seeing some currency gains, particularly those which have lifted interest rates while the elections results are coming through
The domestic currency ran to R15.49/USD ahead of tomorrow’s US FOMC meeting outcome, with market participants fearing indications of a quickening in FOMC member’s interest rate hike forecasts, although the actual dot plot forecast graph is not due.
The FOMC meeting tomorrow night is hoped to give a clear indication on whether there is a reduction in dovishness of the FOMC. A start to QE tapering would be an indication of a reduction, as would any marked worries on inflation, but would be negative for the rand.
The US PCE deflator out last week at 4.4% is high, but in line with expectations, while the US GDP outcome disappointed down to 2% q/q annualised, versus previously 6.7% and expected at 2.6% for Q3.21.
However, October is showing some good University of Michigan readings, while the ISM readings are up into the 70s also for October. Even the Markit PMI was above 50 for the US last month. However, inflation readings are high across the board.
The mixed data for Q3.21 in the US, versus individual economic data reading in October for a number of areas of activity, appears to be indicating a lift in GDP in Q4.21, although only one month’s partial set of data may be too sparse for the FOMC.
Additionally, while the inflation readings have proved much stickier than initially thought, the FOMC has not panicked about them, with wage increases pushing up, showing second round effects, but these are also due to labour shortages.
Markets are worrying over FOMC QE easing, and this is afflicting the rand today, and will likely continue to do so tomorrow until the meeting tomorrow night. South Africa’s municipal election results are starting to come through today.
With 40% counted by 4pm today, the results reported so far show the ANC at 47% of the vote, the DA 23%, EFF 10%, IFP 4% and the remaining parties all below 4.0% each for the tally nationally, but with very mixed results in municipalities.
Having reached R15.49/USD today, the rand has strengthened somewhat to R15.42/USD, and will likely remain volatile and weak ahead of the FOMC meeting, and with risks from the election outcome. So far the rand averages R14.81/USD for the month of October.
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South Africa’s risk of credit rating downgrades remains relatively high
25 October 2021
Rand trades around R14.70/USD, with some subsidence of risk-off in global financial markets but noise from the final run-up to local elections and negative Fitch commentary sees some weakness
South Africa’s risk of credit rating downgrades remains relatively high (we continue to place it at 43%) as seen by ramp up in borrowings, while fractured politics pulling in different directions, exacerbating the difficulty government has in overcoming structural constraints.
The ruling party has attempted to move quicker on structural reforms, but opposition to this from both inside and outside the party has seen little actually occur in moving the country into a freer market state needed to accelerate business dynamism, and so erode unemployment.
While government has made some progress in improving the ease of doing business and has also made inroads into the repair and rebuilding of many SOE’s and government institutions hollowed out by state capture, the enormous damage makes it a lengthy, ongoing task.
Consequently, Fitch is reported to have said it expects South Africa to see weak gains in tackling the very high unemployment rate, particularly for youth, given the many structural constraints to job creation, including the poor educational system.
Furthermore, “Fitch expects (South Africa’s) unemployment rate to average 29.9% over our long-term forecast period to 2030, due to problems in the education system and labour market rigidities”.
It expected a deterioration in SA’s fiscal situation, projecting ”gross government debt to reach 82.9% of GDP by 2026, increasing from 69.4% of GDP in 2020,” which it said would negatively affect the economy and lengthen the path to achieving investment-grade again.
Fitch adds that while it expects some progress, as government has allowed private power generators to provide more capacity, most of these additions would only begin in H2.22 which means the economy would continue to see power supply constraints in the interim.
Consequently, Fitch expects GDP growth of 2.5% y/y for SA next year, after its rebound of 5.0% y/y this year, with a slowdown in global economic growth likely next year which would detract from SA’s performance as well.
The rand is facing headwinds this week, and currently averages R14.82/USD so far this month. However October often sees some churn for risk assets, with the rand having recorded a low of R14.35/USD and a high of R15.20/USD in the past three and almost a half weeks.
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Rand continues to run around R14.70/USD
18 October 2021
The rand has seen some strength last week, as risk-off subsides somewhat in global financial markets with an increased chance that QE tapering could be pushed out to December.
The rand has seen some strength last week on the potential reprieve to EM currencies from a later tapering in US monthly asset purchases, as markets continued to digest the weak outcome of US jobs market data with resultant US dollar weakness.
Recent FOMC communication on a gradual tapering was also supportive, as was the underscoring of still distant US interest rate hikes in the release of its last meeting minutes, with more stringent requirements for hikes then for the start of tapering.
Indeed, the rand strengthened to R14.60/USD early today, currently averaging R14.91/USD for the first two weeks of Q4.21, but has room for further strength, particularly this month and next, with the first and last quarters also typically seasonally strong for the rand.
Markets will still keep a close eye on US economic data releases, and the rand is at risk of weakness in particular on signs of a marked strength in the US jobs market data, as expectations have begun to see some shift from a November to a December tapering.
Additionally, the PBOC (China’s Central Bank or the Peoples Bank of China), is reported to have said that Evergrande’s (the Chinese property developer giant) risks to the financial system are “controllable”, and so not expected to spread, calming international markets.
So too, another risk driver at the end of September, the unresolved fiscal cliff at that point, has seen a reprieve to December, with markets shrugging off some risk concerns in the interim (QE tapering may well only occur in December).
The rand has found resistance at R14.60/USD, and likely this will remain a key resistance level for the currency, as markets temporarily make use of the unexpected (to a number) bout of strength in the domestic currency for some sell-orders.
The rand could see some further attempts at the R14.60/USD resistance level this month and in November, if risk aversion remains moderate, and indeed subdues further in what can be a quiet period, particularly if market views for a December taper firm over this month.
US inflation will remain of concern, although FOMC members’ continue to highlight that “there would likely be sustained downward pressure on inflation in the years ahead”, and the domestic currency will remain volatile, but potentially have a strengthening bias this month.
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Downside surprise in US payroll data should favour the rand
11 October 2021
QE tapering now likely be pushed out till after November, giving EM currencies a reprieve.
The large market surprise on Friday’s US non-farm payrolls saw substantial US dollar reaction. Initial risk-off sentiment dissipated quickly and the rand is now beginning to strengthen as markets digest the nuances implicit in the news. The rand and other EM currencies could see further strength this week as market players continue to digest new US employment and what it means for its QE tapering.
The market seems to have underestimated the impact of the US's third wave of Covid infections on the economy and jobs market. The paltry 194 000 jobs added was well below the market’s expectations of 500 000.
The latest report followed better than expected job numbers in September, with unemployment dropping to 4.8% from 5.1%, although this was impacted by some leaving the labour market.
But the jobs market picture is not as clear-cut as the numbers initially imply. The availability of labour remains a key issue. While the latest numbers might suggest a lacklustre employment market, demand for labour is actually strong. Coupled with a large drop in unemployed workers, the effect is upward pressure on wages. Markets will continue to digest the implications over the course of this week.
With unemployment benefits now set to expire in the US, the labour market is expected to show more convincing statistics of its overall recovery in Q4.21.
Additionally, September’s jobs figures are seen to be impacted by seasonal factors, which will work out the system, seeing improvement later in the year. Until this happens, the Fed is unlikely to be in an inordinate rush to bring in tapering, and we expect that significant tapering could be delayed until December. This could spell as reprive for EM currencies and the rand may see some strength this week.
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The rand moves back below R15.00/USD
4 October 2021
The rand currently averages R14.58/USD this year, with markets highly risk sensitive, although the rand could strengthen into November and December unless the Fed tapers earlier than expected
The rand currently averages R14.58/USD, R17.43/EUR and R20.18/GBP this year. This compares to last year's averages of R16.46/USD, R18.77/EUR and R21.09/GBP. The currency is likely to remain much stronger this year than last, with market participants more willing to accept risk.
There are, however, a number of key factors US fiscal cliff has not helped to lessen risk-off sentiment in global financial markets, it is particularly worsened by the marked rise in US treasury yields, with the ten year reaching 1.54% at the end of last month, in anticipation of tapering.
The Institute of International Finance (which is the global association of the financial services industry) shows that South Africa saw substantial foreign sales of its debt over the past three months, totalling -US$3.6bn, or at an exchange rate of R15.00/USD by -R54bn.
The IIF further shows that foreigners sold -US$4.6bn, or at an exchange rate of R15.00/USD -R68bn worth of South African equities in the past three months (July to September), adding to the drag on the rand, which weakened from R13.40/USD in June, to above R15.00/USD.
Foreigners have also been substantial sellers of Mexican portfolio assets, at -US$5.4bn in the months of July and August alone, while Taiwan has seen a -US$3.2bn sell off for those two months, and Malaysia is close to -US$1.0bn, but China had a US$14.5bn net inflow.
As tapering is seen to approach, US treasury yields have elevated, and in particular markets have worried over a November taper, which has seen more movement in treasury yields recently, and has seen the rand weaken.
.A December taper would only provide some brief respite to risk assets, with the rand often a key gauge of market sentiment. A full taper tantrum (severe negative impact on risk assets) is not expected when tapering begins, but tapering will place a drag on the domestic currency.
While the rand typically sees a stronger period in Q4 and Q1 each year, this will likely not be the case for Q4.21, although the domestic currency certainly is likely to be highly volatile and continue to see periods of marked strength and weakness indefinitely.
That is, so long as the fundamentals of the currency do not deteriorate markedly (or conversely improve markedly), the rand will likely remain on a long-term depreciation trend, although cheeringly the chance of November credit rating downgrades has now reduced.
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The volatile domestic currency tracks above R15.00/USD
27 September 2021
The rand's weakest level in a month, as global financial market risk aversion rises from a number of sources
Markets have continued to digest last week’s FOMC’s statement, which was initially perceived as balanced, with some dovish concerns, but worries have since been rising over the timing of forthcoming tapering, with US treasuries’ yield lifting.
Markets have also fretted over the elevation in FOMC member expectations for the target rate in 2023, with worries that this could show an increasingly hawkish bent, and so potentially tapering as early as the November meeting.
Markets are risk-off, also still concerned about reductions in democracy in China and Hong Kong, as China increases state authoritarianism, heightening regulatory restrictions on consumer and tech businesses and so worrying foreign financial investors into these areas.
The rand has reached R15.08/USD today, although subsequently pulled back to R15.02/USD, with the domestic currency on course to average around R14.60/USD for his quarter, although Q4.21 at risk.
South Africa has also seen its election season kick off with the release of parties’ manifestos over this weekend and into this week (the ANC is still to release its guiding document), also adding to the risky environment the rand is currently facing.
China has also brought through a clampdown on crypto currencies, causing these to weaken, and the regulatory tightening in the tech sector has been very severe in general this year, negatively affecting corporate giants in the industry, and investors exposures to them.
Credit stress is now seen as an increasing risk, with China cracking down on debt (in particular speculation funded with debt) and its overheating housing market adding to stresses, with the communist state also seeking to gain some control over house prices.
Indeed, Chinese property firm, the over leveraged Evergrande, is being seen as having the negative potential of Lehman brothers collapse, although expectations are growing that the Chinese government could bail it out.
Nevertheless, a slew of factors are creating rising risk aversion in financial markets, currently, and the rand is likely to remain volatile, with some dependence on the direction China may take on a potential Evergrande bailout to avoid its default on upcoming debt.
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The volatile domestic currency turns again
20 September 2021
As markets fret about the FOMC meeting this week, fearing tapering may begin even as early as September while SA bond yields have also weakened
The US is facing two days of monetary policy discussions, culminating in potential guidance on future tapering of QE. While markets don’t necessarily expect QE tapering to begin in September, there is very high sensitivity to any indication of when it will start.
Reaching R14.86/USD this morning, the domestic currency has pulled back to R14.73/USD, with the rise in risk aversion negatively affecting commodity prices as well, causing a double whammy for the rand.
September’s FOMC meeting will also deliver projection materials on the Fed’s updated inflation and economic growth forecast, and interest rate expectations, while markets will also seek any indication of a more hawkish tone.
In particular, the Fed’s dot plot (interest rate expectations) chart caused concern in June when it revealed expectations of a quickening trajectory, as FOMC members brought forward rate hike forecasts to two increases in 2023. No further change would support markets.
In June, markets reacted negatively to the quickening in FOMC members’ forecast rate hike trajectory, and the rand weakened from R13.68/USD to R14.10/USD, although Governor Powell warned against reading too much into the dot plot, at the time.
The Fed Chair also highlighted in June the continuation of its asset purchases and interest rates near zero for the foreseeable future in order to “ensure monetary policy would deliver powerful support to the economy until the recovery was complete.”
In July, Jerome Powell reiterated this, adding that “the pace of the recovery in economic activity and employment has moderated in recent months, with weakness concentrated in the sectors most adversely affected by the pandemic.”
The US third wave continues to build, and has affected growth and employment. Deaths from Covid-19 continue to rise in the US, while those hospitalised in ICU are near the same high rates of the second wave.
Global financial market sentiment, and the rand, would be further weakened from current levels if the Fed says this week that it would (as opposed to may) be appropriate to start reducing asset purchases this year.
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Rand on track to average R14.55/USD this quarter
13 September 2021
The Fed’s continuing dovish tone on monetary policy normalisation is supporting the Rand even as Covid-19 risks remain
The US has seen a small dip in its third wave, but it is too early to be certain this signifies an actual moderation in the wave itself. In the US and globally the path of Covid-19 remains uncertain, with further waves expected next year.
The Fed has indicated a cautious approach to normalising monetary policy in the face of this uncertainty, which has benefited the rand and some other risk-on trades. But the pandemic's unpredictability has also caused some volatility, with market participants focusing on US economic indicators for clues on when QE tapering will begin.
US inflation remains historically high, due in large part to disruptions to both the US and global economies by Covid-19. High commodity prices and supply chain pressures are not likely to disappear in the short term.
Higher US interest rates would not help in forcing down supply side inflation pressures; nor indeed would reducing QE, particularly as the US economy is generally being recognised as having hit its growth peak this year in Q2.21.
The US third wave of Covid-19 infections has prevailed over Q3.21, and this will have dampened the quarter’s growth rate, along with consumer and business confidence. It's also continuing to weigh on the labour market, particularly as hospitalisations and deaths increase.
Recent lacklustre US labour market figures and supply-side inflation pressures have been largely ignored by hawkish proponents for sooner monetary policy normalisation, despite evidence of some demand side price pressures.
It is concerning that scientists are not only expecting flare-ups of Covid-19 in many parts of the world next year, but also highlighting the risk of variants emerging that are significantly immune to current vaccines.
Consequently, the path of the virus remains highly uncertain, which is reflected in the Fed's balanced approach -- providing monetary policy support to the economy in the short term while keeping a close watch on longer term trends.
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Rand strengthens as US Covid wave threatens to delay tapering
6 September 2021
The rand strengthened towards R14.25/USD today as the growing Covid-19 third wave in the US continues to negatively impact its economic data, potentially reducing the speed of tapering.
The US continues to see a marked rise in its third wave of Covid-19 infections which is having a negative impact on consumer sentiment as well as market expectations for the rapidity of QE tapering, which previously was strongly anticipated for November even.
The Fed Chair’s comments on a dovish tapering process are increasingly being heard by the markets, after his Jackson Hole address, as key economic data readings continue to show a propensity to disappoint on the downside while the third wave builds.
Deaths too are surging across the US as the delta variant spreads rapidly, with just over half of the population vaccinated, and hard-line anti vaxxers persisting in still significant numbers, while Dr Fauci highlights a number of new variants of interest have emerged.
New variants of interest include mu, which has been identified to have some similar characteristics as the delta variant, but the mu variant possibly may be able to surpass certain antibodies and so some vaccines. It has been found in around forty countries so far.
A variant of interest has the potential to do more harm than the strain it mutated from, with four others also of interest, eta, iota, kappa and lambda. The spread of delta through the US has already negatively impacted confidence measures, with worries over its growth outlook.
A tightening of lockdown restrictions is still not widely expected, in the face of strong anti-lockdown sentiment in the US. The Fed is likely to remain in no hurry to cause substantial QE reduction given the uncertainty, with its dovish approach having sparked some risk taking.
In particular, the Fed watches financial market sentiment, and if this starts to flag and turn significantly negative, it could also add to the FOMC’s caution in reducing QE. The third wave of deaths and cases has not yet peaked, and risks worsening substantially.
The seven-day rolling average of new US Covid-19 deaths is seven times higher than at the start of the third wave and still growing on the rapid rise in Covid-19 underway. There is evidence of some weakening in some areas of the US economy as Covid-19 cases climb.
The rand currently averages R14.64/USD and is on track to average R14.55/USD for the quarter, if not slightly stronger, as the rand continues to attempt to pull towards R14.00/USD. US economic data releases will continue to remain key.
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Rand strengthens on the more dovish tilt to US monetary policy
30 August 2021
Rand tracking towards R14.55/USD on a more cautious sounding approach on US monetary policy than the markets expected, with tapering seen to be slower and cognisant of the severity of the US’s rising third wave
A more cautious sounding approach on US monetary policy from Friday’s Jackson Hole Symposium transpired versus market expectations, particularly on the implications for asset purchases (for weaker, i.e. more dovish, tapering) and this assisted the rand.
A number of the most recent US data readings have proved significantly weaker than expected, notably retail sales, business confidence reading from the Philadelphia Fed, Empire state and ISM manufacturing conditions readings and nonfarm productivity.
With the US third wave not yet having peaked, and new US Covid-19 deaths are over triple since its start, and accelerating, the Jackson Hole Symposium did show concern on the rapid rise in Covid-19 underway and related recent softening in some areas of the economy.
Indeed, the rapid acceleration of infections has worried many, with just over half the US fully vaccinated and worries abound on the effect of tightening restrictions up again given the strong anti-lockdown sentiment in some quarters which may risk riots.
This affected August’s U Michigan sentiment reading on consumer attitudes and expectations towards personal finances, general business conditions and market conditions or prices, yielding a reading that was the lowest since 2011, at 70.2 versus 81.2 the month before.
As such, the reading was lower than any level during the pandemic last year and evidences the disappointment and frustration many now feel towards the third wave, when most had thought the pandemic was past.
Friday’s Jackson Hole symposium showed a more cautious sounding approach on US monetary policy, and implications for asset purchases, assisting the rand, which is amongst the top performing EM currencies since both the start of the year and Friday.
Risk-on has improved reflective of some increased investor appetite for yield, and for so riskier asset classes, and the rand will likely track back to R14.55/USD this quarter, and indeed strengthen beyond that, although market sentiment will be key.
While US monetary policy has indicated its tolerance of higher inflation and inflation expectations, markets worry over the jobs market and this week’s nonfarm payrolls figure’s outcome will have the potential to cause marked rand volatility.
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Rand retains recent weakness
23 August 2021
The rand retains recent weakness on risk aversion in the face of expected US QE tapering already this year, while the rapid run up in the US’s third wave of Covid-19 infections negatively affects sentiment
The domestic currency lost close to a rand since the start of the month, weakening as markets continue to see early QE tapering, while Covid-19 cases spike in the US in its third wave. However, no new lockdown restrictions in the US have been envisaged so far.
The third wave of new Covid-19 infections in the United States is accelerating faster than its second wave last winter, but Dr Fauci, chief medical advisor to President Biden, has been reported as saying already at the start of August that the US will not ‘lockdown’ again.
Adding at the time "things are going to get worse" as the Delta variant spreads, with "not enough (vaccinated) to crush the outbreak, but I believe enough to not allow us to get into the situation we were in last winter” with a worst reported new daily case recording of 300,777.
On the 16th of August this year, the US saw a new daily case’s recording of 259,493 infections, with the seven-day average at 142,414 then but rising since, and the first leg of the US’s third wave has seen a significantly steeper acceleration than occurred in its second.
While August’s US conference board reading is not out (due at the end of this month), August’s U Michigan sentiment reading already showed a dip in consumer confidence as the rapid acceleration of infections worried many, with just over half the US fully vaccinated.
Globally there have been marked protests against Covid-19 lockdown restrictions, and with the US having opened up, worries abound on the effect of tightening restrictions up again given the strong anti-lockdown sentiment in some quarters which may risk riots.
The July FOMC minutes showed strong confidence in the recovery of the US economy and the labour market at that time, with this week’s Jackson Hole communications expected to give strong guidance to the advent of tapering, although risks abound from Covid-19.
Additionally, a number of the most recent US data readings have proved significantly weaker than expected, notably retail sales, the business confidence reading from the Philadelphia Fed, Empire state and ISM manufacturing conditions readings and nonfarm productivity.
With the US third wave not yet having peaked, and new US Covid-19 deaths already triple since its start, and accelerating, the Jackson Hole Symposium could show concern on the rapid rise in Covid-19 underway and related recent softening in some areas of the economy.
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Rand rallies slightly on drop in US consumer confidence
16 August 2021
A volatile rand has pulled back from last week's R14.91/USD. However, over the long term, it's still likely to be at risk of weakness.
The rand has been volatile, weakening on fears the US will hike interest rates before 2023, but pulling back on lower US U Michigan and CPI readings and on reassuring comments from SA’s Finance Minister, Enoch Godongwana on policy continuity in fiscal restraint.
South Africa’s new Finance Minister in particular highlighted that non-interest expenditure will be reduced to 4% of GDP with a primary focus on the cost-cutting coming from government’s wage bill, and that there will be continuity in the fiscal policy trajectory set by Mboweni.
He said, "We come from the same party; we do not have different mandates, and from that perspective, there will be continuity in terms of the sustainable fiscal path he (Mboweni) has chosen."
"As things stand, I do not see any changes in the fiscal framework."
Minister Godongwana’s political seniority and leadership style will aid in his ability to communicate clearly, with a likely interactive style, the ANC’s position on fiscal policy restraint, and aid his ability to say no, where needed, in the face of expenditure pressures.
The Finance Minister also said there will be no tax increases over the medium-term expenditure framework, which is from the current fiscal year of 2021/22 is 2022/23 to 2024/25. The rand doubtless gained some support from all his comments, as did the bond market.
He further underpinned the need for structural reform, increasing skills capacity instead of introducing the controversial basic income grant (BIG), tying in with government’s plan of boosting township economies, which would have the benefit of adding to revenues.
A more co-ordinated policy stance communicated from all areas of government will boost business confidence, which already will have likely received some support from the new Finance Minister’s reassurances, in turn positive for economic growth and job creation.
The rand however continues to be buffeted by international forces, weakening as market expectations of a 25bp hike in the Fed funds rate in December 2022 solidified, but pulling back as US CPI inflation showed the transitory nature of some of the recent price pressures.
The domestic currency averages R14.55/USD to date this quarter, with further volatility likely. The rand could pull stronger towards quarter-end, and into next quarter, although long-term is still likely to still be at risk of weakness.
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The volatile domestic currency weakens again
10 August 2021
Rand weakened to R14.82/USD from R14.31/USD a week ago, after recovering then from closer to R14.96/USD a week before that, as fears of quickened US tapering arise again
Recent rand volatility reflects a bubbling risk-off sentiment in global financial markets amidst concerns that US monetary policy stimulus could be wound back.
The US Federal Reserve Bank highlighted at its FOMC meeting almost two weeks ago that it would keep monetary policy highly accommodative until US employment reached its maximum levels, highlighting at the time that it believed labour participation was low.
However, Friday’s drop in the US’s unemployment rate for July, to 5.4% from June’s 5.9%, was well below the expected 5.7%, while US nonfarm payrolls’ tally of new jobs at 943,000 was well above the 870,000 expected.
The US labour force participation rate, however, did not see much change. It inched up from 61.6% in June to 61.7% in July, which is not a significant enough increase to suggest that a change in the US monetary policy stance is imminent. Since 2015, labour force particpation has typically been above 62.5%.
Consequently, markets likely overreacted to Friday’s US jobs data. Should this assesment prove correct, the domestic currency may have room to strengthen as risk aversion eases. But markets are not yet leaning in this direction, apparently taking their lead from the straight payrolls figure.
The domestic currency has so far averaged R14.53/USD this quarter: fractionally weaker than the expected average.
Last week Thursday night the rand briefly spiked to R14.76/USD on Tito Mboweni’s resignation as Finance Minister, only to recover lost ground on the news he was replaced by Enoch Godongwana, who is reported to be against increased expenditure or taxes.
However, it remains to be seen what stance the new minister will take regarding SA’s government finances. This uncertainty, added to the rand's sensitivity to US economic data and ongoing concerns about the global spread of the delta variant of Covid-19, portends further volatility in coming weeks.
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Rand fails to gain much from FOMC meeting
2 August 2021
Rand benefits from weaker US GDP, with August typically the most risk-off month given the Northern Hemisphere summer, although the impact is mild this year
The rand currently averages R14.53/USD this quarter, typically the worst quarter of the year for the domestic currency, which historically has seen strength in the first and last quarter of the year and weakness in the middle two.
The sell-in-May and-go-away effect which has been the driver for this typical seasonality has been muted to such an extent it has been barely noticeable, although it has made some showing in August now, the month often most afflicted by this risk-off phenomenon.
With Q1.21 averaging R14.96/USD, and Q2.21 R14.13/USD, the seasonality of the sell-in-May and-go-away effect of the Northern summer holidays (where investors reduce risk as they take their annual large vacation break) has been eroded.
For the rand this has been due both to the particular severe strength of commodity prices in Q2.21, but also to less risk-aversion than in other years as lockdown restrictions, travel bans, fear of contracting Covid-19 and vaccine hesitancy have all weighed on traditional travel.
Instead, the rand took its weakening cue from the June FOMC meeting, moving into the R14.00/USD to R15.00/USD range on FOMC member expectations of a quicker US rate hike trajectory, from the R13.00/USD to R14.00/USD it was in.
The rand would have seen substantially more weakness were it not for the support it has had from still elevated metal prices (even though metal prices dipped slightly in July), causing the rand to see less support against the FOMC impact which pushed it towards R15.00/USD.
Indeed, the rand moved very close to R15.00/USD around the July FOMC meeting, but has each day seen mild subsidence, from its worst of R14.997/USD to R14.61/USD yesterday, as the domestic currency pulls closer to the R14.45/USD mark.
However, August is likely to be a risky month for the domestic currency, which could see further marked volatility, while September is a month which has seen marked churn in the past. However, the rand could still see further subsidence from current levels.
While the US GDP figures are nuanced, they are not sparking risk-off either, and indeed, likely to allow some risk on appetite, with the Fed itself also communicating no need to rush and move away from its highly accommodative stance despite FOMC member views.
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Risk-off market sentiment knocks rand ahead of FOMC meeting
26 July 2021
Commodity and EM currencies run weaker as global Covid-19 cases climb
The rand dropped to R15.00/USD today amid global market concerns about the spread of the delta variant. Other commodity-linked and EM currencies were similarly weighed down by the risk-off mood.
South Africa is already ahead of the curve with its third wave rapidly subsiding. Cases in Gauteng (the most afflicted province) are down to below 4 000 a day, while overall the country is now at 9 718 new daily cases, from 11 215 a week ago.
The Western Cape saw notable increases: 2 516 new cases on a seven-day rolling average compared to 2 350 a week ago and 1 619 at the start of June. KZN cases also rose, to 1 375 from 752 a week ago. All other provinces are below 1 000 a day.
Also afflicting the rand from a global perspective is rising nterest rates in EM economies, with Russia recently hiking by 100bp in response to inflationary pressures. South Africa, however, has seen CPI inflation subside: from 5.2% y/y in May to 4.9% y/y in June.
SA’s CPI is likely to see a further drop in July, as base effects continue to wane. But any drop will likely be moderated by a petrol price hike of around 80c/litre due to rand weakness and higher oil prices. The index will likely land between 4.7 to 4.8% y/y compared to the 4.6% y/y previously anticipated.
After staying on hold at the last MPC meeting, the SARB eased its interest rate hike forecasts by about 25bp for this year and 9bp for next year, with 2022 negligible at only 1bp.
Markets will be looking for guidance from this week's FOMC meeting. While the Fed is widely expected to leave its rates and pace of QE unchanged, any indication of a pullback from the current accommodative monetary policy stance will likely exaccerbate risk-on sentiment. Conversely, a more dovish tone would soothe market concerns over global growth despite the resurgence in Covid-19 infections.
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Rand resilient despite unrest
19 July 2021
The rand is back at R14.50/USD, supported by commodities, but the radical destruction of economic activity and infrastructure will set back growth prospects and the currency's future value.
The rand strengthened to R14.36/USD in the early hours of today as thin foreign trade saw the domestic currency being lifted by the positive commodity sentiment still at play, but the domestic currency has weakened since then to R14.52/USD.
The widescale riots, looting and destruction of property in certain areas in South Africa last week as infrastructure was destroyed through arson and other deliberate criminal activities continues to negatively impact the rand now that SA markets are open.
The Covid-19 delta variant, which spread rapidly in SA and in some other EMs, continues its spread around the world, negatively affecting financial market sentiment as well, given the highly contagious nature of this new strain.
Commodity prices are still at elevated levels, despite some consolidation, which has also aided the rand as South Africa remains a key commodity exporter and suppressed economic activity after last year’s harsh lockdowns have limited imports, benefiting the rand.
The damage to SA’s infrastructure will see a further curtailment in economic activity, over and above that lost in the past week from the riots incited by the previous regime’s hardcore supporters, which combusted into opportunistic looting and was fuelled further by poverty.
Appetite for fixed investment in South Africa has also taken a hard knock, as will consumer and business confidence, and even the appetite for some to remain in the country, particularly for the high-income groups which are internationally mobile.
Loss of investors and skilled individuals, both of which usually characterise the internationally mobile residing in SA, even for those whom it takes longer to emigrate, would also negatively impact the future economic prospects for the country, creating a negative cycle.
Such is the impact from a severe elevation in political risk for any country. SA risks not bringing the political risk sufficiently under control, with the slow response from state security forces seeing some in the private sector having to defend themselves and their property.
The rand has seen some volatility from all these factors, with rising Covid-19 numbers impacting EM currencies in particular (SA’s are still moderating), but SA would lose out by lagging further behind global recovery now as well, which will tell on the rand in future.
Relatively quick shutdown of unrest key in rand's recovery
In general, risk-off sentiment has had some negative impact on EM currencies, as market players worry about global economic recovery as Covid-19 cases rise internationally, resulting in some risk-off and some US dollar strength on safe haven flows.
Against this backdrop the rand has made noticeable gains since its low of R14.79/USD on Wednesday last week when South Africa’s riots spread, raging out of control until military action and private sector self defence mobilisations (in the main) arrested further insurgence.
However, many in poor communities tried to gain some items too. A devasting impact of the lost decade of 2010 to 2019’s collapsing growth and state institutions under state capture has been on the poorest of society, and this added to the riots’ momentum.
Calm has been restored on many fronts, with policing now very active, and the military in place to also fend off attacks on strategic key points such as harbours, electricity substations, water treatment plants etc, attempted attacks to radically destroy the economy.
The relatively quick shutdown of the insurrection (as termed by President Ramaphosa), has been key in aiding the rand’s recovery, evidencing collective determination by the majority not to let the country and economy collapse, although the threat from insurgents is not past.
The tail effect from the insurgency, and ensuing participation of some communities and/or community members on sentiment, will be negative and risks being long lasting, dissuading tourism, both domestic and foreign to some degree, and further cutting off economic activity.
SASRIA payments need to urgently be actioned, those without SASRIA cover should be compensated by the state to restore economic activity, jobs and livelihoods as soon as possible, allowing the negative effect on South Africa’s collective psyche to be shrugged off.
The aim of the destruction by the instigators was to create fear, chaos, extreme disorder, undermine the Ramaphosa Presidency and the country at large, and was intended to spread throughout South Africa, burning productive capacity to the ground.
Preventing further destruction of the economy, and so of livelihoods and lives should be paramount now. Growth enhancing reforms must finally be implemented quickly, and strong market orientated, growth perused, while populist, nationalist polices are discarded.
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Hopes of slowing infection rates marred by looting and violence
12 July 2021
As Gauteng's infection curve drops steeply, unrest by Zuma supporters threatens to sabotage SA's economic recovery.
The rand is averaging R14.31/USD in the first couple of weeks of Q3.21, but has traded at R14.50/USD so far today (R17.18/EUR and R20.10/GBP) as the incarceration of former President Jacob Zuma sparks unrest and looting.
The rand weakened in response to the widescale riots and destruction of property in certain areas in South Africa as the disgraced former President’s supporters are reported to have closed off some roads, set fire to certain shops and looted electronic and other retail goods.
While police action has been noted in some areas, other spots have seen little intervention. If left to continue unchecked, impact on South Africa’s overall economic activity, business and consumer confidence in Q3.21 could be severe. With the economy already under pressure from tightening lockdown restrictions at the turn of Q2.21 into Q3.21, growth forecasts may now be further downgraded.
SA risks seeing economic growth of less than 4% y/y this year if key CBDs, retail shopping malls and road transport routes remain closed, and particularly if the violence spreads as Zuma supporters and opportunistic criminal element bring economic activity in a number of areas to a standstill.
It was reported earlier today that the army will be deployed in Gauteng and KwaZulu Natal to assist the thinly-stretched police force.
Supporters have appeared to expect little or no real retribution so far. The risk is that the collapse of law and order spreads across the entire country, shutting off the economy and making it more difficult to roll back from the initial violent outbursts (not the base case).
If more individuals join in to gain the spoils to be had from looting any and all retail outlets, it is likely that appliance, clothing, food, and other retailers will become targets.
Apart from losses faced by the private sector, the volatile situation, if not rapidly brought under control, will quickly begin to impact investor sentiment, threatening to derail the hard-won gains in the Ramaphosa presidency.
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Rand dogged by slow vaccine rollout and continuing political tensions
5 July 2021
Spiking Covid-19 cases and domestic politics weigh on the currency even as US and global market sentiment soars on signs of recovery.
The rand began the third quarter of this year at R14.42/USD, then went on to strengthen to R14.25/USD, R16.91/EUR and R19.74/GBP. We expect an average of R14.35/USD this quarter, although SA remains at risk of falling behind the global recovery due to its relatively slow vaccination rollout.
Key economies such as the US have covered 50%+ of their populations with effective vaccination against Covid-19, bolstering global financial market sentiment of a persistent economic recovery. According to the IMF, US growth of this year will be around 7%, after last year’s -3.5% y/y. And growth is expected to continue beyod this year, with the IMF forecasting 4.9% y/y for 2022. This on the back of fiscal stimulus aimed at infrastructure investment, boosting the productivity of the labour market, education, R&D and childcare
The broad gamut of US planned expenditure includes the American Jobs Plan (AJP) and American Families Plan (AFP). State expenditure is expected to increase by around US$4.3trillion over the next ten years, although there is uncertainty about the timing.
The IMF expects that the plans will add 5.3% cumulatively to US GDP over the 2022 to 2024 period as a strong productivity boost creates more jobs with better wages, thereby reducing inequality and increasing inclusive growth.
The US infrastructure drive is particularly focused on the electricity, telecommunications, water and transport sectors, with a view to reducing capacity constraints and improving productivity in its economy. These goals are similar to those outlined in the South African Economic Reconstruction and Recovery plan, as the country seeks urgently to address productivity constraints associated with inadequate state services.
South Africa saw 26 485 new cases of Covid-19 on Saturday, spiking the seven-day rolling average up to 19,143. This exceeds SA’s second wave where new daily cases reached 21,980 at its peak, and a seven-day rolling average peak of 19,042 -- higher than the first wave.
Gauteng's third wave exceeded the peak of the first two some time ago, and remains the worst-affected province, even as new Covid-19 cases accelerate noticeably in the Western Cape and KwaZulu Natal, with the North West and Limpopo provinces following a smiliar trajectory.
The US fiscal plan has lent the rand some strength. However, headwinds are not limited to Covid-19 and the vaccine rollout. Infrastructure constraints including electricity shortages, and now increasing water shortages in key areas such as Johannesburg, represent a binding constraint on economic growth. Overcoming these and other challenges is further complicated by ongoing corruption, with ongoing efforts by the courts to bring the corrupt to account stumbling in recent days.
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Third wave and threat of US rate hikes stall rand rally
28 June 2021
The currency has held above R14.00/USD, lagging other EM peers on relatively lower domestic interest rates and a fresh Covid-19 surge
With the US Fed signaling possible interest rate hikes this year, a number of emerging market central banks are also adopting a more hawkish approach. The Brazilian real has now overtaken the rand to become the strongest EM currency since the start of the year -- up 6.8% thanks in large part to interest rates increasing to around 25bp below pre-pandemic levels. At 3.5%, SA’s repo rate, in contrast, is a full 300bp below its pre-pandemic level of 6.5%.
Russia too has been hiking its interest rates, by over 100bp, while its currency is the third strongest this year since January, up nearly 3.0%. Mexico’s rate hikes have also supported its peso, as have Hungary's, whose forint is leading EU rate hikes.
Against this backdrop, with higher inflation stoking higher EM interest rates, SA’s SARB governor also appears to be adopting a more hawkish outlook, indicating that the economy is seeing a stronger than expected recovery, and that inflation could nudge interest rates higher. This even as a third wave of Covid infections, and resultant tighter lockdown measures, presage slower economic growth.
The adjusted level 4 implemented last night is predominantly aimed at limiting or eliminating gatherings by encouraging people to work from home, closure of schools and numbers at funerals now limited to 50 with no night vigils. Interprovincial travel is limited, and alcohol sales banned, which will negatively impact the hospitality, tourism and restaurant sector, with many businesses not recovered from last year’s lockdown.
With the highly contagious delta variant seeing infections higher than in the first two waves, government is scrambling to contain contagion within Gauteng and prevent a similar surge in other provinces.
The slow progress of SA’s vaccination drive, which has so far reached only 4.5% of the population, is also being held up by little to no vaccinations over the weekend due to insufficient government funds. This amidst fresh instances of corruption and theft of state funds, even in the health sector.
While we still expect no interest rate hikes in South Africa this year, the SARB has started talking of normalising monetary policy, which, combined with the negative impact of the third wave and higher restrictions, will slow the pace of economic recovery.
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Rand settles above R14.00/USD
21 June 2021
Rumblings from last week's FOMC dented the risk-on setiment which have permeated markets of late, causing the rand to consolidate
The rand weakened to R14.38/USD after last week’s FOMC meeting, negatively affected by the increased hawkish nature of US FOMC members’ interest rate forecasts as well as the ongoing high rate of new COVID-19 infections in SA’s key economic province, Gauteng.
Despite some placatory comments from Fed Chair Powell that the elevation in individual FOMC members’ interest rate forecasts (the dot plot chart) in 2023 should not be taken as a given for the future rate hike trajectory, the dot plot update nevertheless reduced risk on.
The majority of EM currencies are weaker on the year, with the ZAR still leading the emerging market (EM) Bloomberg currency ranker, but this is mainly due to its extremely weak base of a year ago when it was the worst performer out of this EM currency basket.
The platinum price is up 27.1% y/y currently, seeing less annual strength than in June before last week Thursday’s FOMC meeting when the platinum price ran consistently above 40% y/y, although still lending the rand some support, which is up 20.9% y/y.
Markets continue to re-evaluate risk, and foreigners have sold off -R4.5bn in SA bonds since the FOMC meeting and -R5.5bn in equities, both net of purchases with South Africa’s Reserve Bank (SARB) warning on the potential for rand weakness to feed through into inflation.
The SARB governor is also reported to have noted that “(t)he economy is less vulnerable than it was last year –- we have got a current-account surplus and the budget balance has recovered faster than we had actually expected”.
And further that, SA will be “going into normalisation from a very solid basis”. “That should help the Treasury stabilise debt”, with the SARB likely to hike interest rates if there is evidence of second-round effects from rand weakness in inflation.
While the SARB is sounding a less dovish tone, and this is likely to help the rand retain some support, SA’s Reserve Bank is also likely to not hesitate to hike interest rates as global monetary policy becomes less accommodative, and rate hikes increase in other EMs.
While we currently don’t expect any interest rate hikes in South Africa this year, 2022 could well see the SARB begin hiking, given its past hawkish bent, even before the US does, which is currently seen likely to be only in 2023.
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The rand runs weaker as the pace of new Covid-19 infections intensifies
14 June 2021
Covid-19 infections intensify in Gauteng, with the death rate also increasing, as South Africa's economic provincial hub is worst hit by the third wave.
The rand has weakened to close to R13.80/USD, negatively affected by the spiking in Covid-19 infections in South Africa’s key economic province, Gauteng, which has shown a phenomenal jump in new cases, up 78,942 yesterday since 6th May.
There has been a geometric expansion of new Covid-19 cases in Gauteng, and the seven-day rolling average for the country’s most productive province is now close to the peaks of the first and second waves. Load shedding too has been negative for the currency.
Vaccinations are only at 1,619,011 country-wide in a population of sixty million, with the elderly (over sixty and estimated at around 5,000,000) and health care workers still in the process of being vaccinated as phase two continues overlapping with phase one.
The extremely slow rollout of vaccines, with the department of health having failed to expedite the process to meet the original planned schedule, means that the country will most likely not reach two-thirds immunity by year-end as was originally planned.
Instead, instances of corruption have been indicated in a number of areas across the public health system as public monies deemed to be used for private gain instead of being spent on the vaccine rollout and in other critical areas.
The take-up of the vaccinations by the over sixties’ age group continues to be relatively weak, with some monies earmarked for advertising and promoting the drive to be vaccinated having been reported as forming part of the looting.
SA has failed to vaccinate the vast majority of its economically active population, and with deaths now rising rapidly in Gauteng as unvaccinated individuals succumb to Covid-19, there has been little impetus to vaccinate all those over forty who wish to receive it.
That is, the pace of vaccine rollout has proved too slow to prevent the third wave, beset with problems from international delivery on quantity, quality of vaccines received, and suitability, to domestic problems as the drive kicked off late and was exceptionally slow until May.
While May and June has seen a quickening in vaccine rollout, the pace is still too slow and SA risks substantially more Covid-19 deaths. So far, Q2.21 averages an exchange rate of R14.06/USD, although the rand could weaken further as Covid-19 cases continue to spike.
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Rand at strongest levels against the dollar since 2019
7 June 2021
The rand has hit R13.40/USD thanks to positive global market sentiment and SA's strong trade performance. But long-term risks remain.
The last time the rand saw such strength against the dollar was in early 2019. The recent reversal of fortunes in the domestic currency reflects the strength of the trade account, as South Africa’s exports continue to benefit from a commodity price boom.
SA is unused to such strength in the domestic currency. After two decades averaging a trade deficit of close to -R0.1bn, the average trade surplus for 2020 and 2021 to date is R26.5bn, and the average surplus for the first four months of 2021 was R36.9bn.
South Africa’s terms of trade (the ratio of exports to imports) are strongly positive. Not only has the commodity boom raised the prices for SA’s resource exports, but the rand’s strength has also dulled oil import costs.
The rand also continues to benefit from global growth expectations, which continue to underpin positive sentiment and the risk-on environment, as do supportive global monetary and fiscal policies.
However, the currency remains sensitive to key US data releases, and we continue to believe that a financial market "taper tantrum" as the US slows its fiscal stimulus measures would not leave it unscathed. Evidence that the US is recovering strongly, particularly its labour market, will likely reduce rand strength.
Friday’s lower-than-expected US nonfarm payrolls figures (559,000 versus expectations of 650,000) consequently saw the rand briefly strengthen to R13.40/USD, before being rebuffed from this resistance level. At the time of writing it was back around R13.48/USD.
So far, Q2.21 averages R14.18/USD, with our current forecast R14.15/USD. While the rand may prove to average closer to R14.00/USD this quarter, there remains a strong risk of weakness should there be a switch in market expectations on US QE and interest rates.
Any indication that the US is seeking to reduce (taper) its bond-buying programme, reducing the creation of US dollars seeking high yielding investments, would reduce the attractiveness of the rand.
While inflation has rightly been seen as a key factor in US monetary policy, the Fed is likely to look past the recent jump in inflation, which is largely due to temporary statistical base effects, and instead, focus on employment data. This could see a strong quarter end for the rand, with the risk of depreciation heightening in Q3.
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Rand steams ahead on interest rate differential and commodity boom
31 May 2021
Despite net portfolio outflows in May, the currency is enjoying support from the commodity boom, strong relative bond yields and general risk-on sentiment.
May saw a modest net inflow of foreign investment into SA bonds (R5.9bn) but a more substantial sell-off of SA’s equities (-R7.1bn). But the net outflow failed to dampen rand strength, most likely thanks to strong commodity exports.
The rand reached R13.73/USD today. It's likely to average R14.05/USD this month, and potentially R14.15/USD this quarter. The strongly supportive global monetary policy environment is also benefiting the domestic currency, as are SA’s interest rate differentials.
The differential between the yield on the ten-year US treasury and SA’s ten-year bond has widened to 7.67% from close to 6.00% in 2018, making SA bonds attractive to foreign investors, although this spread has been narrowing this year. At the start of 2021, the spread between the US and SA ten-year yields was at 8.00% and has gradually worked down to 7.67% currently, with global financial markets also in yield-seeking (risk-on) mode.
The rand has been sensitive to market expectations on US interest rates and yields, with some inter-day and inter-week volatility, but this has been relatively mild, with the global risk-taking environment a supportive backdrop for both the commodity boom and EM assets.
US yields may see some further lift this year if inflationary concerns worry markets materially again, with the US not expected to keep interest rates on hold indefinitely, and the strength of commodity prices and other supply-side pressures causing some concern.
While the US has seen very substantial fiscal stimulation, with the stimulus cheques US households have been receiving supporting economic activity, the pressure is essentially supply-side in nature with limited true demand-side price pressures. But as wages rise and unemployment winds down, higher demand could trigger the US Federal Reserve to raise interest rates to counter inflation. This is not expected in the immediate future, however, and the rand is therefore on track to retain its strength this quarter.