Strong rand likely to be short lived

The rand traded in a narrow range on Friday (18 October) as markets paused momentarily to digest some of the events that have taken place in recent sessions.

“Just when we thought that this week would merely represent a continuation of the dominant themes that have been lingering for months, and even years, we finally saw some crucial issues drawing to a close,” said Bianca Botes, treasury partner at Peregrine Treasury Solutions.

“Brexit has dominated the United Kingdom’s (UK) agenda since 2016, leaving many to wonder whether the UK and the European Union (EU) would ever be able to negotiate a deal. The tide turned on Thursday, however, as the EU and UK announced that they had finally reached an agreement.

“South Africa also managed to take a step in the right direction on Thursday, as Cabinet promulgated the long-awaited Integrated Resource Plan (IRP),” said Botes.

Brexit news sweeps all else aside, but is it really over?

UK Prime Minister Boris Johnson took centre stage this week after reaching a deal with the EU.

“The controversial prime minister might have this victory in his pocket, but the fight to leave the EU by end of October is far from over, as the true challenge now lies in getting the deal approved by parliament. Opposition leader Jeremy Corbyn is ready to put up a fight, publicly condemning the deal shortly after it was announced while encouraging MPs to vote against the agreement,” Botes said.

She said that president Donald Trump remained true to form, engaging in conflict with Turkey this week following Turkey’s military incursion in Syria.

“In a rather scathing letter that urged the Turkish president Recep Tayyip Erdoğan not to be a “fool” and a “tough guy”, president Trump made it abundantly clear that he would not hesitate to destroy the Turkish economy should an acceptable agreement between the two countries not be reached.”

The recent poor economic data from the US reignited fears of a global slowdown, and markets are once again preparing for an interest rate cut by the Federal Reserve as a counter measure.

Retail sales disappointed, dropping to 4.1% year-on-year in September, while a contraction of 0.3% was witnessed month-on-month. Initial jobless claims this week rose to 214k, while manufacturing production also showed signs of a slowdown, Peregrine Treasury Solutions said.

Brexit has been only one of the many woes facing the EU, as sluggish economic growth continues to add pressure to the bloc.

Load-shedding hogs SA news, and it’s also not over

Unexpected load-shedding has again left the country intermittently in the dark since mid-week, as embattled power utility Eskom fights to avoid a total collapse of the local power system.

This latest round of load-shedding comes shortly after NERSA declined Eskom’s application for yet another tariff hike, Botes said. “With the timing being rather suspicious, Eskom has blamed the load-shedding on five power-generating units falling out of use due to boiler tube leaks.

“Load-shedding is estimated to be costing the economy in the region of R2 billion a day and poses a significant threat to the local GDP. A downward adjustment in the GDP forecast to 0.8% could now be an overestimation, depending on the duration and intensity of rolling blackouts throughout the country,” the currency expert said.

Cabinet meanwhile, promulgated the Independent Resource Plan (IRP) that addresses electricity supply for the next 10 years. The IRP incorporates aspects such as the deployment of alternative energy sources, the decommissioning of coal power stations, while proposing nine interventions to respond to energy demand.

Peregrine Treasury Solutions noted that local retail sales released this week undershot expectations, rising by 1.1% year-on-year during August, down from the previous 2%.

Stronger, but not for longer

With a Brexit deal in the bag, the market will now turn its attention to the UK parliamentary vote, which will determine whether the UK will meet its 31 October exit deadline, or whether it will once again have to approach the EU for an extension.

A split focus on the US will see markets searching for guidance on the finalisation of a trade agreement between the US and China, while the US-Turkey conflict and the impeachment process of president Trump will also remain on the radar, Botes said.

Economic figures released by China are also likely to impact on the performance of the rand, as growth concerns continue to plague sentiment. Third-quarter GDP figures revealed that economic growth slowed to 6% from a year ago, slightly weaker than the expected 6.1%, and representing the lowest growth level seen since 1992.

“Locally, the suspension of load-shedding, sooner rather than later, will be of vital importance to the performance of the rand as we head toward the mid-term budget, as well as Moody’s ratings announcement set to take place shortly after.

“The rand’s retracement is likely to be short lived, driven by expectations of a Federal Reserve interest rate cut, as well as the resolution of uncertainty regarding the energy plan for the local economy,” Botes said.

While the rand momentarily pushed above R15.00/$ following the reintroduction of load-shedding, poor economic data from the US, coupled with the approval of the IRP, saw the rand gain substantial ground against major currencies again on Thursday. After starting the day at R14.92/$, the rand managed to rally to an intraday high of R14.79/$.

The rand traded at the following levels against the major currencies on Friday:

  • Dollar/Rand: R14.83  (0.01%)
  • Pound/Rand: R19.05  (-0.40%)
  • Euro/Rand: R16.49 b (-0.03%)

Read: Rand jumps on news of South Africa’s new energy plan

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Strong rand likely to be short lived