Rand gains 3% in ‘perfect storm’

The rand remained on the front foot in the morning session on Friday (21 June), a position it has held for most of the week as it gained 3% against the dollar.

“Every now and then, the elements align, creating either the perfect storm or otherwise leading to perfect blue skies amidst stormy weather, and this week can fortunately be described as the latter,” said Bianca Botes, treasury partner at Peregrine Treasury Solutions.

“In treacherous economic times, beset by global uncertainty, growth constraints and trade disputes, by some miracle all events favoured the local unit this week, ranging from a dovish US Federal Reserve to clear optimism from ratings agency Moody’s with regards to the outlook of the local economy.

“This harmonious alignment assisted the currency to gain 3% during the week, recovering to levels above the fair value of the rand against major currencies.”

Global data and politics

Botes said that trade wars remain top of the agenda for market participants, with focus now shifting to the G20 summit which is due to kick off in Japan on 28 June.

“However, the chances of the United States and China concluding an agreement at the summit remains slim, and analysts expect President Trump to drag out the trade war for as long as possible as part of an election ploy.”

The rand analyst said that while the Federal Reserve did not cut interest rates in the week, the dovish stance by the Fed was certainty reiterated, implying that a rate cut by as much as 50bps could be on the cards towards the end of the year.

“Initial US jobless claims also outperformed, dropping to 216,000 from the previous week’s 222,000, while the services and manufacturing PMI data is due for release later today.”

Peregrine Treasury Solutions added that lingering fears of a no-deal Brexit continue to haunt the UK, and the anticipated cost of a hard exit continues to weigh heavily on confidence as the financial implications grow more devastating by the day.

Central banks meanwhile, have made headlines recently, with the European Central Bank (ECB) indicating that quantitative measures are being considered to aid the ailing European economy – much to the dismay of US President Donald Trump, who labelled the announcement as “unfair” to the US.

South Africa

Locally, Botes said that president Cyril Ramaphosa’s much-anticipated State of the Nation Address left many South Africans with perhaps even more questions than before the address.

“While the tone of the address was upbeat and positive, the country remains in the dark as to what exactly the turnaround plan for the economy will entail.”

Botes commended the president for ‘painting a picture of a bright South African future’, with opportunities for each and every citizen, but despite outlining the goals and objectives for the current administration, he failed to clarify exactly what the content of the address meant.

Peregrine Treasury Solutions unpacked some of the information communicated by the president.

Ramaphosa named seven key policy drivers, namely:

  • Education;
  • Economic transformation;
  • Social wage consolidation;
  • Local government improvement;
  • Improved social cohesion and community safety;
  • An ethical and capable state;
  • A better Africa as a whole.

He then outlined five goals as part of the administration’s 10-year plan in line with these key policy drivers, namely:

  • The eradication of poverty and inequality, with the aim of not a single person going hungry;
  • Economic growth that exceeds population growth;
  • Creating two million youth employment opportunities;
  • Ensuring that every 10-year old will have the ability to read for meaning;
  • Cutting the number of violent crimes by at least 50%.

“The aim of these key initiatives is to level the playing field and create an economic environment where all South Africans can thrive,” said Botes.

“This will result in an economy that can compete head-on in the global market environment, and that can actively participate in and contribute to global economic growth.”

This, unfortunately, is where the water becomes a bit murky, as the president only provided broad brushstrokes as to how the aforementioned goals will be achieved, including:

  • Increasing the number of police officers;
  • Implementing a broad-based and aggressive reading program to improve literacy;
  • Reigniting manufacturing and production by deploying industrial zones and SME incubators;
  • Launching an infrastructure fund to reignite infrastructure development and investment that will also revive the construction industry.

“Most South Africans were hoping for more information on exactly how these initiatives will be implemented, and more importantly how they will be funded.

“It seems, however, that we will have to deploy some patience, as it would have been impossible for the president to do a deep-dive into each of these initiatives during SONA, and we will just need to trust that government intends to deliver on these promises,” Botes said.

Other contentious issues that need further attention include Eskom, land redistribution and the mandate of the South African Reserve Bank (SARB). Ramaphosa said the government will give Eskom “a significant portion” of the R230 billion it needs over the next decade to remain solvent.

Rand movement

“While the rand is currently all the rage, the local unit remains the clear underperformer when comparing to the year-to-date performance of the rand to its peers.

“With many speculating that the potential of a credit rating downgrade is growing by the day, South Africa remains extremely sensitive to short-selling and the volatile global environment,” said Botes.

She said that the overall picture for South Africa has not changed, with many key policy questions still remaining unanswered.

And while the SONA address boosted positive sentiment, the looming question of how these objectives will be funded remains a key concern.

“With the trade tension dynamic taking a breather, and the dollar remaining under pressure, the opportunities to purchase foreign currency at current levels should be utilized, as the global backdrop remains a slippery slope that could trigger a rand sell-off at any point,” said Botes.

On Friday morning, the rand traded at the following levels against the major currencies:

  • Dollar/Rand: R14.32  (-0.20%)
  • Pound/Rand: R18.19  (-0.22%)
  • Euro/Rand: R16.18  (-0.14%)

Read: President Ramaphosa sets the record straight on Reserve Bank

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Rand gains 3% in ‘perfect storm’