Star-struck rand holds at R14.60/$ as global monetary easing takes centre stage
Markets / 13 September 2019, 5:30pm / Bianca Botes
JOHANNESBURG – The local unit seems to be star struck by global markets as all elements move in favour of the rand. The past two weeks have seen markets turn from skittish and risk averse, to an emerging market dream. Factors may be ranging from a truce between the US and China all the way to easing by central banks and are all weighing in on the exceptional performance, but South Africa is far from saved just yet.
Monetary policy easing takes centre stage globally
Trade tensions eased this week as the US once again agreed to sit with China to further negotiate trade agreements, this time in October. The truce came as a welcome relief after months of strain between the two countries had sent market sentiment into a tail spin. JOLTS job openings in the US this week underperformed coming in at 7 217m, while PPI accelerated marginally by 1.8 percent year-on-year in August. CPI remained fairly flat at 1.7 percent during the same period, with initial jobless claims decreasing to 204k for the week. Retail sales as well as import and export price indices are due for release today.
Subdued economic growth in the EU led to widespread anticipation of quantitative easing by the ECB which did not disappoint. On Thursday, the ECB dropped interest rates by 10bps, putting the euro under additional pressure, and also announced that quantitative easing – ECB buying back government issued bonds, in effect putting money in to the European economy – will restart in November in an attempt to stimulate the strained region. Industrial production for the EU decelerated by 2 percent year-on-year in July, while trade balance and wage data are scheduled for release today.
Donald Trump and Boris Johnson seem to be in constant competition to make headlines. The PM might be in the lead this week, as rumours of lying to/misleading the queen over the parliamentary suspension made its way to the press. He scored a small victory, however, as the court ruled on Thursday that a no deal Brexit would not violate the peace accord in Northern Ireland. UK GDP indicated no growth quarter-on-quarter for Q2, with unemployment remaining flat at 3.8 percent.
The Chinese economy has been feeling the pinch of an ongoing tariff tiff with the US, while the recent protests in Hong Kong have contributed to the uncertainty. This week saw PPI year-on-year for August at -0.8 percent, while inflation remained flat at 2.8 percent during the same period. Vehicle sales disappointed dropping by 6.9 percent year-on-year, followed by a decline in FDI from 7.3 percent to 6.9 percent.
South African environment remains dire
The local landscape remains unchanged, with tension still brewing in the streets of major metropolitans, while Sandton is due for a complete shutdown today for a protest against gender based violence.
The Zondo commission managed to become quite entertaining, and even comical, as Hlaudi Motsoeneng took the stand to face questions regarding his tenure at the SABC. While the depth of state capture remains gut wrenching to listen to, it is a struggle to take anything he says seriously.
As South Africans we have become quite inured to violent crimes which seem to be so intensely a part of everyday life. The statistics published this week once again reminded us of the dire situation the country faces in the fight against crime. Police Minister Cele expressed his concern specifically on the 3.4% rise in murders, which reached a total of 21,022 of which 1,014 were children. Cele committed to improving policing, as well as facilities at police stations, however no clear plan is in place to address our crime rate.
On the economic front, manufacturing remains under pressure, adding only 0.4 percent month-on-month in July, undershooting expectations of 1.2 percent, while business confidence continues to decline, reaching 89.1 points in August. On Thursday mining production numbers for July indicated a 2.4 percent increase while gold production lost 13.1 percent year-on-year in August.
It is clear that the rally in the rand is in no way a result of local elements. Rather, the improvement witnessed in the local unit over the past two weeks can be attributed to two key global factors that are driving risk appetite:
Continuous monetary easing by central banks including the Chinese Central Bank, European Central Bank and the Federal Reserve;
An easing in trade tension between the US and China.
On Thursday we saw a massive retracement in the rand, gaining as much as 1.5 percent against major currencies on the back of the ECB rate cut and quantitative easing decision.
While the stronger rand is certainly helping to restore some positive sentiment locally, a word of warning would be in order. The rally in the rand, although it can be expected to extend even to around the R14.20/$ mark should the favourable environment persist, would not be sustainable in the longer term. We urge those purchasers looking to acquire foreign currency not to become too greedy, as the rally will eventually run out of steam, and they might end up missing a fantastic opportunity.
All eyes on the Fed and SARB in the week ahead
The week ahead will see the focus shift to the interest decision by the Federal Reserve as well as the SARB MPC taking place on 18th and 19th September respectively.
From a data perspective, we will be keeping an eye on Chinese and US production numbers, while CPI from the local economy will assist in setting the tone for the MPC interest rate decision.
With the rand managing to break below key technical levels this week, a leg lower in terms of range becomes applicable, with an anticipated range of R14.50 to R14.70.
Bianca Botes is treasury partner at Peregrine Treasury Solutions.