The rand surprised the market with a strong push to below R13/$ on Tuesday afternoon as the unit capitalised on a weaker dollar.
Earlier on Tuesday the rand continued its previous session’s slide to reach R13.12 to the greenback as the local unit faced more upside pressure from the North Korean missile launch.
By 16:47 the rand was trading at R12.99/$, 0.32% firmer than its previous close. It strengthened to R12.93/$ earlier in the session.
RMB currency analyst John Cairns said in his daily note to clients that the latest missile launch was North Korea’s most provocative ballistic test yet, as the missile flew over the northern Japanese island of Hokkaido, generating warnings for citizens to take cover.
“Given that a war between Japan/Korea/US and North Korea would be devastating — and generate R2.00+ big figure rise in USD/ZAR — one can understand the market’s nervousness.
“However, the problem with the catastrophe trade is that there is only a very small chance of a massive market event and a near certain chance that nothing will happen. Betting on the catastrophe therefore is almost always going to generate a loss, which is to say that, as with all the previous missile launches, expect risk aversion to die away rapidly, and for risk assets to recoup their losses,” Cairns said.
Commenting on the latest move, TreasuryOne told Fin24 there is no particular reason for the rand’s sudden strength.
“It surprised the market. The rand is capitalising on a weaker dollar and the North Korea missile scare has fallen into the background.”
TreasuryOne dealer Andre Botha earlier said North Korea’s missile launch early on Tuesday will only serve up more geopolitical tension, and more risk-off behaviour can filter into the market which can stop the rand from breaking through the R13-level against the US dollar.
The rand was slightly weaker against the dollar on Tuesday afternoon, in volatile trade.
The local currency weakened to R13.71 to the dollar in earlier sessions, but improved to R13.58 in intraday trade.
Local political uncertainty and a ratings review by ratings agency Moody’s were the main risks the rand was facing.
In April‚ Fitch Ratings and S&P Global Ratings downgraded SA’s debt to “junk” status after President Jacob Zuma fired Pravin Gordhan as the finance minister in a Cabinet reshuffle.
Moody’s was expected to visit SA in May, before announcing its country rating in the weeks thereafter.
At 3.33pm‚ the rand was at R13.6367 to the dollar from Monday’s R13.6135‚ at R14.8489 to the euro from R14.8805 and at R17.6230 to pound from R17.6191.
The euro was at $1.0889 from $1.0931.
By Reitumetse Pitso for www.businesslive.co.za
After then finance minister Nhlanhla Nene was axed in December 2015, the rand weakened dramatically. This time around, however, despite the even worse news of Pravin Gordhan’s axing and SA’s downgrade to junk status, the rand has proved remarkably resilient.
How do we square this? Are the markets getting so used to bad news coming out of SA that they have stopped reacting to it? Or is there some other factor at play?
Before President Jacob Zuma’s cabinet reshuffle on March 30 the rand was trading at R12.40/$. In the following two weeks it weakened by roughly R1.50 against the dollar. But at the time of writing, it had reversed almost one-third of its losses, firming by 50c to trade at R13.40/$.
What is evident is that the local news flow — dominated by mass protests against Zuma and a growing clamour for his resignation — certainly doesn’t justify the biggest rand rally in six months.
“Total rand losses of a mere R1 seem remarkably limited given all that has happened,” says Rand Merchant Bank (RMB) currency strategist John Cairns.
Dollar weakness and better Chinese trade data appear to have triggered the latest rand gains, but far more interesting is the currency’s longer-term outlook.
Surprisingly, given how much SA’s prospects have darkened, Cairns has not downgraded his rand forecast of R13/$ for the year end. Of course, the situation remains in flux and RMB could still change its rand forecast. But for now, Cairns says there are two positive factors RMB believes might offset the negatives.
First is the significant narrowing of SA’s current account deficit. This has been caused mainly by slowing imports due to falling domestic demand and firmer exports following the recovery in commodity prices.
RMB expects the deficit to average 2.8% this year compared with an average of 3.3% in 2016 and 4.4% in 2015. This will take significant pressure off the rand.
Second, a more positive growth outlook in advanced economies has contributed to a more favourable environment for emerging markets and commodity currencies as a whole. As a result, foreign capital inflows into SA’s bond market have held up remarkably well.
The favourable external backdrop helps to explain why the market reaction to SA’s recent downgrades has been more benign than experienced by other countries when they lost their investment-grade status.
“We continue to feel that the external backdrop is restricting far bigger losses on our local markets,” says Cairns, “It seems a rising tide lifts even half-submerged boats.”
Efficient Group chief economist Dawie Roodt is also sticking to his year-end rand forecast of R13/$.
Both Roodt and Cairns are assuming that Zuma will stay on as president this year and that there will be no further dramatic political negatives or further downgrades to SA’s local currency rating.
Like Cairns, Roodt made this forecast many months before Zuma reshuffled his cabinet and caused many to wonder if SA’s democratic project had permanently run aground. So the fact that he hasn’t lowered his forecast also bears scrutiny.
Roodt has a remarkably successful track record in correctly predicting the rand, having won the 2016 Sake24 economist of the year award for the accuracy of his forecasting against that of more than 30 other economists.
His forecast that the currency would average R13/$ in the final quarter of 2015 was the closest to the actual figure of R13.09/$.
Roodt looks set to be closest to the pin again this year, with a forecast of R14/$ for the final quarter of 2016 compared with the actual figure of R13.91/$.
In January 2016, when he made this forecast, the rand rose to a new record high of almost R18/$ during intraday trading as the markets battled to digest the axing of Nene.
“Everyone said I was crazy,” chuckles Roodt. “Some said the rand would be R20/$ by the year end.”
He bases his rand forecasts on the observation that on a 35-year view (1980-2015), the rand has on average been roughly 50% undervalued against the US dollar on a purchasing power parity (PPP) basis (see graph).
The easiest way to understand the theory of PPP is to use The Economist’s Big Mac index. It was invented as a light-hearted tool to make it easier to compare the misalignment of exchange rates between countries. It was never intended as a precise gauge, explains the magazine, but rather a fun way of explaining PPP.
In January 2017, the price of a Big Mac burger in the US was $5.06. In SA it was R26.32. At the prevailing exchange rate of R13.95/$ at the time, a Big Mac in SA cost only $1.89.
So according to the “raw” Big Mac index, the rand was undervalued by almost 63% against the US dollar on a PPP basis.
This made the rand the fourth most undervalued currency against the US dollar among 44 countries surveyed, after Malaysia (64.6% undervalued), the Ukraine (-69.5%) and Egypt (-71.1%)
Roodt bases his study of PPP not just on the Big Mac, but on a more representative basket of goods published as a series by Oxford Economics, one of the world’s largest data providers.
By this yardstick, the rand at R13/$ would be 54% undervalued, making Roodt fairly confident the currency will move back towards this level over time.
“I’m pretty sure the rand will come back. It always does, very strongly, but it never resets to purchasing power parity. It is always about 50% undervalued on average. So if it stays at R14/$, and inflation remains where it is now, then this would be an exception,” says Roodt.
Roodt, in fact, considers the rand at R14/$ to be a “screaming buy”, given that SA’s 10-year bond yield is highly attractive at 9% and that SA’s bond market is exceptionally liquid and well-integrated, so investors can get out quickly.
“Where can you get such an attractive yield with an undervalued currency at the same time?” he asks.
This explains foreign investors’ continued appetite for SA bonds, despite the highly uncertain political environment.
Based on Roodt’s PPP estimates, the rand has fared remarkably well during the current crisis compared with previous episodes.
In nominal terms, the rand dropped by just 12% in the first two weeks after Gordhan’s axing before pulling back sharply. In PPP terms the rand at its recent worst of R13.95/$ was just 56% weaker than parity.
By comparison, in 1985 after then president PW Botha’s famous “Rubicon” speech, in which he failed to announce the dismantling of apartheid, the rand nose-dived by 66% in nominal terms. It was the sharpest nominal decline in the history of the currency.
At its worst, the rand was 72% undervalued against the dollar but it recovered shortly thereafter, mostly because inflation accelerated.
During the 2002 rand crisis, contagion from the Asian financial crisis caused the rand to collapse by 47% in nominal terms. It reached an undervaluation low of 73% but again bounced back quickly, mostly because of a nominal exchange-rate correction, helped by some inflation.
The rand suffered another huge blow when Nene was axed. At its worst level of R18/$ it was 69% weaker than parity. The reasons for the rand’s fall were mostly political but, unlike now, unfavourable international forces were also at play.
At the time, fears were growing that China was heading for a hard landing. The deteriorating growth prospects of emerging markets, particularly for commodity-producing countries such as SA, caused persistent capital outflows from these markets.
Had the same global conditions been in place now, there is little doubt that the fallout from Gordhan’s axing and SA’s downgrade to junk would have been far more severe. This doesn’t mean the political and economic implications aren’t deeply worrying — only that Zuma’s timing was excellent.
By Claire Bisseker for www.businessday.co.za
The rand was weaker on Tuesday afternoon as it emerged that President Jacob Zuma had told senior leaders of the South African Communist Party (SACP) that he planned to fire Finance Minister Pravin Gordhan.
When the market learnt on Monday that Zuma had recalled Gordhan and his deputy, Mcebisi Jonas, from an investor trip to the UK and US, the rand nosedived from 20-month highs it scaled last week.
The president is reported to have told senior leaders of the South African Communist Party that he plans to dismiss the finance minister.
After hitting a fresh 20-month best level of R12.31 against the dollar in Monday’s opening trade‚ the rand plunged more than 3%, or 52c, to an intraday worst level of R12.8295/$ in the afternoon.
The rand also weakened against global majors and went from being the best-performing emerging-market currency to one of the worst-performing currencies.
Rand Merchant Bank (RMB) analyst John Cairns said further runs on the rand were possible but Monday’s rand losses were nothing compared with what happened in the worst-case Cabinet reshuffle scenario when former finance minister Nhlanhla Nene was replaced in 2015. At that time, the rand shed 150c immediately and 250c within a month.
Cairns said the best rand scenario for the day was for the rand to stabilise above R12.50/$ within a 30-cent range, the worst case scenario would be a Cabinet reshuffle.
At 11.30am the rand was at R12.9766 to the dollar from a previous close of R12.7616. It was at R14.0954 to the euro from R13.8647 and at R16.3203 to the pound from R16.0221.
The euro was at $1.0859 from $1.0864.
By Reitumetse Pitso for www.businessday.co.za
The rand broke through the important R13.20/$ resistance level to the dollar in late afternoon trade on Tuesday, and stands poised to crack R13 if the strengthening trend continues.
The rand failed to consistently break through R13.20/$ on four occasions since August.
“The rand is firmly on the front foot for now and a break through R13 looks promising at this stage,” said TreasuryOne currency dealer John Moni.
He said the main driver was uncertainty in global developed markets.
“These include the looming presidential election in France, as well as the uncertainty created with the resignation of President Donald Trump’s national security advisor, Michael Flynn.”
At 3.40pm the rand was at R13.1055 against the dollar form R13.3351. It firmed to a 18-month best level of R13.07 in intraday trade.
The rand was at R13.9132 against the euro from R14.1319 and at R16.3531 against the British pound from R16.7046.
The euro was at $1.0616 from $1.0596.
The rand was also supported by a weaker dollar, which could not hold on to the firmer levels below $1.06 to the euro. It reached $1.0591 on Monday but slipped over $1.06 in late afternoon trade on Tuesday.
The emerging market strength in the currency markets came as investors awaited comments from US Federal Reserve chair Janet Yellen, who was scheduled to testify before the US congress later on Tuesday.
Yellen’s address to congress was expected to provide more information on the planned interest-rate increases in the US for the year ahead.
Other factors supporting the rand include somewhat of a reprieve in the dismal local unemployment data, with unemployment in the fourth quarter of 2016 improving to 26.5% from 27.1% in the third quarter.
“However, the unemployment rate was still higher when compared to the 24.5% in the fourth quarter of 2015,” Investec economist Kamilla Kaplan said.
By Maarten Mittner for www.businesslive.co.za
The rand returned to its strengthening path on Tuesday 16 August as a weaker dollar lent support.
US inflation data, which are due for release later in the day, will play a key role in the US Federal Reserve’s decision to hike rates, which will affect the dollar’s performance against other currencies.
Trading Economics expects US inflation to have held steady at 1% in July on an annualised basis.
UK inflation and other economic data are also due out on Tuesday. The data are expected to reflect the effect of Brexit on the economy.
“Inflation data are the biggest news for today as we’ll see if the UK and the US have been able to muster up any of it during July. I believe sentiment will drive the market today, and a test of R13.20/$ is on the cards,” TreasuryOne dealer Phillip Pearce says.
The rand has gained more than more than 15c in the past 24 hours against the dollar as well as advancing against the euro and the pound.
At 9.10am‚ the rand was at R13.2724 the dollar from R13.2993 at the previous close.
It was at R14.9130 against the euro from R14.8750 previously‚ and at R17.1105 against the pound from R17.1329 previously.
The euro was at $1.1236, from at $1.1183 at its last settlement.
By Andries Mahlangu for www.bdlive.co.za
Fears of a further slowdown in the economy and political risks pushed the rand over the R15/$ level again yesterday, and a key index showed that private companies are battling to survive, write Ntsakisi Maswanganyi and Maarten Mittner.
The Standard Bank whole economy purchasing managers’ index (PMI) fell to 47 from 49.1 in February — the most marked deterioration in operating conditions in more than a year and a half. Readings below 50 signal declines.
This means less investment, further job losses and limited support for economic growth — one of the reasons SA is at risk of a credit rating downgrade.
The average PMI for the first quarter was the worst since the inception of the survey almost five years ago.
The rand tanked more than 2% to R15.13/$ after President Jacob Zuma survived a motion to impeach him in Parliament.
Global risk aversion also dragged down the rand and the JSE which closed in the red.
Rating agencies would take the political situation in SA into account when reviewing its credit rating, Finance Minister Pravin Gordhan said after Parliament voted against impeaching Mr Zuma.
“Politics, economics and the fiscal situation are all things rating agencies watch out for. South Africans should be aware of that,” Gordhan says.
Businesses that procure equipment or supplies from international markets are at risk of significant losses if they have not reviewed the impact of the falling rand on the insured value of their property and assets. In the last year, the cost to replace machinery or equipment procured in the US and Europe has rallied by more than 40%.
Between January 2015 and 2016, the rand devalued by 45% against the US dollar from trading at R11.43 in January 2015 to R16.58 on 26 January 2016.
By 22 February 2016, the rand had recovered to R15.31 to the US dollar, but still represents a massive shortfall compared with one year ago.
“Any manufacturing or retail operation that uses imported plant, machinery or materials will see the replacement cost of such equipment increase substantially if it is purchased in a currency such as sterling, the euro or the US dollar. Assuming a claim occurred now against a policy which incepted on 1 July 2015 when the rand/dollar was around R12.20 to the US dollar and had to be replaced at the current exchange rate of R15.31, the current rand value is at least 25% higher than its rand value at inception. When you factor in inflation, that figure is closer to 35%,” explains David Stratton, strategic account manager at Aon South Africa, risk advisors and insurance brokerage.
“It soon becomes very evident just how important it is to insure properly against such losses, which could see you underinsured by as much as 50% in the event of a loss or claim. Many policies will have a clause dealing with Escalation due to Currency Fluctuations, where the insurer will allow for changes in the rand’s value over the course of the policy period. However, this clause is usually subject to a limit stated in percentage terms, and specified in the policy schedule. Given the Rand’s recent performance this percentage may be insufficient.
Other policies may be arranged on a Day 1 Average basis, average referring to the insurance term dealing with under-insurance in the event of a claim. In such cases the value at the inception date is not challenged when there are currency fluctuations but can be challenged if it was inadequate in the first place. However, this too can be limited to a specified percentage,” explains Stratton.
It is worthwhile to have a professional valuation carried out on buildings and plant. In addition to having these assets correctly valued in a baseline valuation, it is also possible for the valuators to calculate the imported content of your insured values, which will enable you to assess the potential impact a currency fluctuation may have.
“In light of the continued volatility of the rand, it is essential to safeguard your assets and your ability to recover successfully from a significant setback. A serious disaster such as a fire at a warehouse or manufacturing facility could have catastrophic consequences when faced with potentially massive underinsurance due to the depreciation of the Rand.
“Consult with a professional risk advisor who can assess your specific requirements and the extent of your imported content exposures through a thorough needs analysis, and clarify any shortcomings and exclusions in your cover,” concludes Stratton.
The rand plummeted by the most in more than seven years on Monday as the market turmoil in China and a drop in US stocks deterred risk-taking.
The rand weakened against a globally stronger dollar in early trade as the greenback was buoyed by expectations of strong US payrolls data.