By Lameez Omarjee for Fin24
The rand came under “massive pressure” on Tuesday morning, having weakened from R13.63 to R13.90, following news that US President Donald Trump is threatening new tariffs on Chinese imports.
TreasuryONE’s lead dealer Wichard Cilliers said in a snap note that all eyes would now be on the trade spat.
By 09:14 the local currency was trading 1.92% weaker at R13.90 against the US dollar after breaching this level for the first time since November 27 last year when the rand traded at R14.00/$.
“The trade wars are heating up with US president Trump to identify $200bn in Chinese imports for additional tariffs of 10% and on another $200bn after that if Beijing retaliates,” said Cilliers.
Trump reportedly said that the United States will no longer be taken advantage of on trade by China and other countries in the world. “We will continue using all available tools to create a better and fairer trading system for all Americans,” Trump said.
The IMF noted that this could place global growth at risk.
Bloomberg reports the tariffs could be the latest round of punitive measures in an escalating dispute over the large trade imbalance between the two countries. Trump recently ordered tariffs on $50bn (R692.77bn) in Chinese goods in retaliation for intellectual properly theft. The tariffs were quickly matched by China on US exports.
Apart from the trade wars, locally load shedding is also adding to currency weakness, commented NKC Africa Economics.
NKC expects the rand to trade within a range of R13.65/$ to R13.95/$.
RMB economist Mpho Tsebe noted that the rand was among Monday’s worst-performing emerging market currencies, along with the Colombian peso and the Thai baht.
“Given the fragile growth outlook and inflation contained within the 3%-6% target band, the SARB (South African Reserve Bank) is unlikely to increase interest rates to support the currency,” she said.
Peregrine Treasury Solutions’ Bianca Botes said investors are dumping emerging markets for safe haven assets, including US treasury bonds. “South Africa, due to the liquidity that our local market offers, often leads the losing streak, she said.
“Should these tensions elevate and strong data from the US keeps making its way to market, emerging market currencies will remain under pressure and one could very well see the rand target R14/$,” Botes warned.
However, Andre Botha, senior currency dealer at TreasuryONE was optimistic that the rand could recover.
“We still believe that the rand is overdone at these levels and should the tide turn and risk-taking behaviour start taking precedent again the rand could stage a comeback.” He echoed views that the rand’s performance largely depends on global events rather than local factors.
The rand eased in early trade on Tuesday, relinquishing some of the gains it notched up in a previous session on news that the ruling political party, the ANC was deciding whether to cut short president Jacob Zuma’s tenure as head of state.
According to a report by Reuters, the currency is expected to trade in the range of R12.00 to R12.25 on Wednesday, after it eased off its highs against the dollar during European trade on Monday.
The currency is tracking a wave of positive sentiment following the appointment of deputy president Cyril Ramaphosa, as ANC leader in December, while the ruling party’s top leadership has also decided that Zuma must leave office, with speculation about the timing.
Ramaphosa is expected to adopt more business-friendly policies, even though he enjoys the support of the communist party and the biggest labor union federation. His election as ANC leader helped boost the rand 10% last month.
At 09h55 on Tuesday, the rand softened against the dollar, but firmed against the pound and the euro:
• Dollar/Rand: R12.09 0.33%
• Pound/Rand: R16.90 -0.13%
• Euro/Rand: R14.83 -1.43%
A report by The Guardian late on Monday reiterated that plans are in place to oust Zuma within the next two weeks, despite comments from secretary general Ace Magashule that NEC had not yet made a decision on the future of the current president.
Investec Bank economist Annabel Bishop said in a note at the start of the week that the rand could strengthen to as much as R11 to the dollar, should the president be forced to step down.
Further strengthening would also cause fuel price cuts and place downward pressure on inflation, with the possibility of the rand moving towards R10 to the dollar should Ramaphosa continue to make reforms and promote growth, she said.
Bloomberg market analyst Robert Brand also remained positive on the currency, stating that it was possible for Ramaphosa to continue the rally by continuing to clamp down on corrupt state-owned enterprises such as Eskom, and possibly even move away from some of the ANC’s more populist ideas (such as land reform) so as to encourage continued foreign investment.
The rand rallied on Tuesday, strengthening to below R13.50 to the US dollar as the race for the ANC president enters the final stages.
Deputy President Cyril Ramaphosa is now firmly in the lead after winning backing from most ANC branches to succeed President Jacob Zuma as ruling party leader.
READ: Ramaphosa has edge, but leadership victory not guaranteed
RMB currency strategist Ilke van Zyl said in a morning note that the positive turn in local politics could buoy the rand further.
The local unit has clawed back more than a rand since it breached R14.50/$ just over two weeks ago on plans by President Jacob Zuma to push through free higher education.
By 09:10 the rand was trading 0.4% firmer at R13.46/$ from an overnight close of R13.52/$. The unit was still trading in the high R13.70s on Monday.
“Local politics are the main reason for the significant rally in the rand this morning as the race for ANC president enters the final stages. Kwazulu-Natal endorsed Dlamini-Zuma with 433 (69%) votes vs. 193 (31%) votes for Ramaphosa. But this was more than neutralised by Limpopo that crowned Ramaphosa with 391 votes (79%) vs. Dlamini-Zuma’s 104 (21%).
“Ramaphosa is now firmly in the lead and has the backing of five provinces with a total of 1 862 votes. Dlamini-Zuma has four provinces behind her and a total of 1,309 votes. Simplistically, this is a 59/41 percent split in favour of Ramaphosa,” she said.
Van Zyl however said it is important to remember that not all of the branches were allowed to vote and an accreditation of delegates will take place on the first day (the 16th) of the conference.
“Either way, this gap is very unlikely to be closed.”
South Africa’s GDP growth numbers are also due for release on Tuesday, with economists expecting an easing to 1.7% in quarterly growth from 2.5% recorded in the second quarter.
Van Zyl reckons markets are already pricing in low growth and the release should have minimal impact on the currency.
The rand surprised the market with a strong push to below R13/$ 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 tanked on Monday after the Public Protector recommended changes to the Constitution that would see the removal of a clause to protect the currency.
Public Protector Busisiwe Mkhwebane announced her findings after her investigation into the South African Reserve Bank’s assistance to Bankorp between 1985 and 1995, which Absa bought in 1992. She wants Absa to repay R1.125bn, a move the bank refutes as it believes it has paid all money owed.
However, her big remedial action was a recommendation that the Portfolio Committee on Justice and Correctional Services change the Constitution.
It “must initiate a process that will result in the amendment of section 224 of the Constitution, in pursuit of improving socio-economic conditions of the citizens of the republic, by introducing a motion in terms of section 73(2) of the Constitution in the National Assembly and thereafter deal with matter in terms of section 74(5) and (6) of the Constitution”.
She wants section 224 of the Constitution to read:
“The primary object of the South African Reserve Bank is to promote balanced and sustainable economic growth in the Republic, while ensuring that the socio-economic well-being of the citizens are protected.
“The South African Reserve Bank, in pursuit of its primary object, must perform its functions independently and without fear, favour or prejudice, while ensuring that there must be regular consultation between the Bank and Parliament to achieve meaningful socio-economic transformation.”
Mkhwebane’s suggestion removes reference to “protect the value of the currency”, Bloomberg told traders on Monday.
The Constitution currently states: “The primary object of the South African Reserve Bank is to protect the value of the currency in the interest of balanced and sustainable economic growth in the Republic.”
Opening Pandora’s box
Nomura economist Peter Montalto said the rand is taking a knock because it’s “not a good headline … it’s a live wire issue”.
“Even if a change here is not likely to actually occur, the risk of it is important to markets and ratings agencies,” he said in an emailed comment to investors.
“This is quite unusual that a Public Protector has been so specific on changing the Constitution or indeed be so radical on transformation.”
“This is touching the real last Pandora’s box,” he said. “Note, whilst the PP is meant to be independent she is widely viewed as a Zuma loyalist.
“I don’t think this is going to happen in the short to medium run. The ANC cannot really muster the support to change the Constitution in Parliament and would require a two-thirds majority.
“What the worry is here is that actually it’s much, much easier than that. You just need a new MPC (monetary policy committee) mandate, which is done by a letter from the FinMin to MPC and can be done technically at any time.
“I do not think (Finance Minister Malusi) Gigaba is going to do that, but this raises the risk and promotes the idea in public debate about how secure this last bastion of an institution is.
“The SARB is also one of few ratings positives for the ratings agencies,” he said. “The very fact this issue is being raised and the SARB dragged into the debate is negative.
“However, I see the SARB leadership strongly and resolutely defending their independence and existing mandate including via court action if necessary.”
By Matthew le Cordeur for News24
Markets have reacted to events at the African National Congress National Executive Committee meeting in Johannesburg over the weekend.
The rand gained considerable strength when news emerged that a vote of no confidence had been tabled.
But it quickly retreated when the motion failed.
Economist Dawie Roodt says the rand is inextricably linked with President Jacob Zuma’s fate.
“It is interesting to watch financial markets because quite often, one can actually see how Jacob Zuma is doing by simply watching the exchange rate of the country.
“What has happened though over the weekend, as soon as it became clear that there would be a debate on the future of Zuma, the rand actually appreciates very strongly against most other currencies.”
Meanwhile, Zuma has come out swinging following the failure of a motion of no confidence in him.
The motion was tabled at the ANC NEC meeting over the weekend.
It failed to garner the necessary support to carry.
Zuma attacked his critics in the NEC in his closing address, saying he knows those who want him to step down are pushing an agenda of foreign forces and he’s warned them to stop.
Three sources in the ANC NEC have told Eyewitness News that Zuma was hard-hitting and furious when he gave his closing remarks at the NEC meeting, responding to those who called on him to step down.
It is understood that the president told the NEC meeting that those who wanted him to resign are pushing an agenda of foreign forces.
The sources say the furious president told the meeting that he was poisoned with the intention of being killed and warned that he knows who is plotting against him and where they get the money from.
It’s understood he also told the meeting that he can’t be blamed for the party’s loss of key metros, saying it was the ANC’s failure to manage regional dynamics that resulted in the poor showing at last year’s polls.
By Clement Manyathela for www.ewn.co.za
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