THE CONTINUED rand strength over the last few months had meant complacency had set into the market – and that meant that it was a bloodbath waiting to happen.
And so it was…
And to make matters worse for those caught out, the sharp weakness was triggered by rand-positive news, instead of rand-nrgative news, upending conventional wisdom, and confounding economists once again. Let's get into the review where you can see how you could have benefited from this information at the right time… and have been able to take action on it before it was too late.
The week began with our forecast on Friday July 29, before all the action of the week had even begun. The outlook for the dollar/rand gave the pattern before the week began, with the rand trading at R14.28 to the dollar, the trend was further upward to R14.40 to R14.65 before hitting resistance levels and topping out.
It was going to be another intriguing week … and it sure was, with some big events during the 5 days:
US Interest Rates – the first US interest rate cut in more than 10 years flashed the economy warning signs everyone had been waiting for.
Trade talks – the US and China were at each other once again in the trade war, following more unsuccessful trade talks during the course of the week.
Eskom losses – the 2019 financial year was nothing short of a disaster for the state-owned power utility.
Moody's concerns – following Fitch’s decision, all eyes were on the next move from Moody’s credit agency.
The rand opened the week around R14.25 to the dollar, R15.85 to the euro and R17.60 to the pound. And when it came to events, where else to start but with the major talking point for the week – the US economy.
All signs pointed toward the US cutting interest rates on Wednesday, which they did – in fact, there was a pressure for there being more than just a 0.25 percentage point cut, as Trump’s view was that it was not enough. This is the first time that the US has cut interest rates in over 10 years – quite a staggering statistic. To put this in perspective – the last time the US cut interest rates, Bitcoin did not even exist.
But most importantly, how did the rand react to this? Logically, it should have resulted in Rand strength. Conventional wisdom says that when US interest rates drop, this makes the US dollar less attractive versus other currencies such as the rand, which would now be giving a better return, and therefore be more attractive. Therefore the dollar should obviously weaken and the rand strengthen.
So what happened?
Well, the not-so-obvious happened. And again another move to baffle economists and debunk rational thinking. And when the rate cut was already expected, who would have thought such a volatile move would be expected – let alone in the wrong direction.
Other talking points for the week
One of the biggest threats facing South Africa right now is a ratings downgrade. Fitch already pulled the trigger last month, downgrading South Africa’s investment grade outlook from stable to negative. They highlighted concerns over the government’s financial support of Eskom and low economic growth. It remains to be seen what decisions Moody's takes, as they are the main player in the game.
However, what they would have seen this last week would not have encouraged them, as Eskom announced a net loss of R20.7bn for the 2019 financial year. This was better than the R25bn expected, but the reality was pouring money into Eskom right now is equivalent to a black hole!
Just when it looked as if we were onto better ground with the Trade War, Trump pulled another move out of left field as he announced further tariffs on China on Thursday. This will be another 10 percent on more than $300 billion worth of goods – including some major players such as Apple’s iPhone. As the trade talks continue to proceed without any real clarity, so does the uncertainty internationally. The urgency for a solution is becoming more critical by the day, as this is a real global problem for everyone which is not going away.
Despite far bigger problems to deal with, the ANC has continued to waste time over the discussion on the sovereignty of SA Reserve Bank as emerged this week. From the ANC National Executive Committee, the message was clear: “The sovereignty of SARB must be returned to people of South Africa.” This is ominous talk, with the Reserve Bank being one of the last institutions with transparency integrity and clarity around decision making at this time – and yet there is a desire to meddle with the way it is working. One only has to look at Zimbabwe and Venezuela to see what happens when the central bank gets into the hands of a communistic regime in order to solve the dire straits the state is in financially.
Yet that is what seems to be the focus of the ANC, instead of focusing on the unemployment problem which was a glaring black mark this week. The worst unemployment figures recorded since of 29 percent in Q2 of 2019!
What is good to know is that South Africa is not the only country with problems. The EU continues to argue over how things should work out with Brexit, and new Prime Minister Boris Johnson is finding that it is not all so simple for him to get the British exit completed. Johnson has given an ultimatum to the EU over Brexit talks, and unless they first agree to his demand to reopen the divorce deal they struct with Theresa May. So far, they have refused. In the meantime, the pound has been taking a hammering.
On the back of all this news, the rand had a torrid time in the latter half of the week.
The week ahead
As we head into a new week, there is not much in the way of economic data releases, but the Rand is nevertheless expected to be just as volatile as it has been the last couple of weeks.
James Paynter is a financial market analyst and founder of Dynamic Outcomes.