Rand Bumps Back to Reality Over R13.50/$

Rand Bumps Back to Reality Over R13.50/$

James Paynter  | Feb 12, 2019 01:48

As it so often is, after a cracking turnaround from the Rand, a bump back to reality arrives...

A weaker Rand is not always bad news though.

It brings some relief to those who are exporters, with a weaker the Rand giving more bang for their buck they get when it comes to inflows of foreign currency.

But it was a tough week for those who rely on a stronger ZAR...

...as local pressures took their toll.

Let's get into the review, as there's a lot to cover!
Here are some of the biggest events from the last week:

  • Ramaphosa's SONA - his second attempt at the speech was a hit, as his style of positive outlook and a clinical delivery of the speech was well received...
  • UK's Brexit - with margin for error becoming ever smaller, Britain is beginning to take steps to prepare for the worst
  • Eskom crisis - some clearer plans are now developing as to how the electricity giant can be saved, but the worries remain
  • Rand price fixing - the Competition Commission case is back into the spotlight with Standard Chartered (LON:STAN), the British bank, pleading guilty to the charges.

Well...

The big month of February is truly upon us - and there is still so much more to come

On the SA agenda, the next big one is the Budget Speech. This tends to be more of the cold, hard facts, like an income statement. Rather than Ramaphosa's SONA, which is more like an elaborate business plan.

On the subject of the SONA, Ramaphosa did seem to do a good job in laying out some quality plans, and perhaps glossing over some of the potential pain points for investors.

The key points from his speech went something like this:

  • Eskom will be split up into 3 separate entities - Generation, Transmission and Distribution. An essential and key point this.
  • Investment in SA in 2017: R17bn. Investment in SA in first 3Q of 2018: R70bn.
  • Another investment conference to be organized, as the first brought in nearly R300bn in investment pledges.
  • SA will go to the polls for the General Election on May 8th.
  • The NSC (National Security Council) is going to be re-established to assist with intelligence and security of the state.
  • State-owned land will be redistributed to accelerate land reform
  • Brulpadda oil and gas find "could well be a game-changer for our country"
  • And then there was the apparent "taming” of Julius Malema, which saw the EFF sit quietly throughout with no interruptions - the first time in 4 years!


These very positive points and plans laid out amongst other announcements meant that the speech was well received!

However, despite it hitting all the right notes, it really lacked deep detail and timelines for reforms.

For once, the Rand held its own during the speech, making its way through to R13.58 around the US close...

USD/ZAR Chart

It had already been a tough week for the Rand leading up to this point, as concerns around Eskom had triggered the move of 40c to get to well over R13.50/$.
In other news...

    • Brexit talks are likely to go down to the wire, according to the UK government... A last minute escape or disaster seems to be just around the corner, and for businesses, this is absolute turmoil. A company like Nissan is now deciding to not even build new models in the UK, due to the uncertainty of the Brexit situation. This is not the first company to say this either, as risks go far wider than just manufacturing, and there are worries over food shortages and much more. What a scary mess!

    • The splitting of Eskom into 3 separate parts is certainly going to be a talking point for some time yet, but there is a lot of common sense in what is being done. The question is as to whether this move is coming too late, as there are warnings that Eskom requires more than R100bn, and the price hikes which are already far too much for most Saffers, are not going to be enough to recover from its debt. It is going to take a miracle from Ramaphosa and his Eskom task force to save this one!

    • On the subject of the Eskom price hikes, these are the most accurate figures we have thus far... The utility company has asked for a 17.1% increase in 2019-2020 and a further 15.4% in 2021-2022. This is a grave concern with the potential risk of increased inflation already high, and SARB's focus being on reinging that in as soon as possible. Thanks to the stronger Rand and reduced oil prices, it has been brought back to 4.5%, but remains a concern if these price hikes go ahead.

    • The Rand may not have had a great week, but it has certainly had a good 2019 so far. According to Fin24, it is the best performing currency of the year as per the 6th of Feb, with a 7% gain against the Dollar making it one of the most attractive emerging markets. Not something you read about every day, so best we enjoy it while we can!
    • In Trump's State of the Union address, he announced that he was going to be having a meeting with Kim Jong Un in Vietnam later this month, hopefully further settling global tensions. However, there is still no clear outcome of trade talks with China, meaning that this remains as a potential emerging market trigger...
  • One last update was the Standard Chartered Bank pleading guilty to manipulating the Rand between 2007 and 2013. They were one of a long list of banks who were involved in the fixing scandal, which is now confirmed by their confirmation of guilt. It is amazing that such big banks have gotten away with something like this for so long...on the list is also South Africa's Investec, ABSA (JO:ABGJ) and Standard Bank (JO:SBKJ). It remains to be seen how exactly the remainder of this one plays out, and what the fees, fines, or bans may end up being fixed on the different banks. However, for a start, Standard Chartered will be paying $40m (R530m or so) to the New York State Department of Financial Services!


The Rand closed the week around 13.60 to the Dollar, with an up and down week finally gaining some stability around that level...

A tough week, but not all is lost for the USDZAR as it still sits 100c stronger than where 2019 began.

The Week Ahead (11-15 Feb 2019)

With February rolling on to its second week, there aren't too many economic events this week, with US Retail Sales being the only one of note.

But that doesn't mean that it will be a quiet week while we wait for next week's Budget speech. Of course, there's still the trade war and Brexit to watch, and of course, Trump's twitter account.

But we won't be watching anything except the patterns of sentiment to give us and our clients with Rand exposures a clue as to where the market is likely to head in the short, medium and long term.

And we suggest you do the same if you have some exposures, and need a roadmap for expected movements.

We are here to help.

To your success~

James

Original post

James Paynter

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