Fundamental analysis: four-year lows for ZAR amid risk-off mood
The South African rand has made dramatic losses in the second half of this week as risk-off mood has dominated in markets. South Africa’s Budget on Wednesday also confirmed the weaker expectations for the country’s economy this year. On the other hand, data from South Africa this week have generally been quite good.
EUR–ZAR surged up to six-month highs around R17.32 this morning. Dollar-rand meanwhile made a four-year high at nearly R15.69, with pound-rand similar, up to R20.24. The rand also tanked against the yen this morning, trading below ¥7 for the first time since late August 2019.
Sentiment and the coronavirus
The uptick in the spread of the coronavirus outside China has generally had a significant negative effect on most risk-on instruments. Nearly every index and most trade-sensitive currencies have posted large losses over the past few days. The role of sentiment is important for the rand, but the more tangible factor is the likely impact of lower demand.
China is a very important trade partner for South Africa, with the latter exporting a significant chunk of its products from mining to the PRC. Quarantines and their knock-on effects as well as lower productivity in China expected over at least the next few months mean that South Africa’s exports will probably take a hit.
South Africa’s Finance Minister Tito Mboweni tabled 2020’s Budget in Parliament on Wednesday. Markets had almost universally anticipated a weaker outlook here, so there wasn’t much that surprised traders initially. The rand reacted by making brief gains on the day.
The Budget outlined cuts to projected expenditure of around R156 billion. These are widely considered to be necessary for the government to balance spending with income; however, economists commenting on the release generally noted that bigger decreases will be needed sooner or later. Projections for national debt over the next few years are still about the same, with 71% of GDP projected for 2022-2023.
Despite consensus that the government is trying to move in the right direction on spending, the fiscal situation is still grim. South Africa’s deficit widened over the past year to reach an 18-year record.
Lacklustre but not dismal economic data
Despite gloom from sentiment and to some extent the Budget, this week’s releases of regular economic data from South Africa have been pretty good. Annual PPI for January was up 4.6%, beating expectations by around 0.3%. This morning’s annual money supply was better than the consensus by about 3%, although annual private sector credit missed expectations slightly.
Looking a bit further back, the key data in February were less good in most cases. Last week’s building permits were down 13%, but annual inflation and core inflation were basically in line with the consensus. Annual gold production for December increased by 25%, the best result for this figure since the end of 2015 but only the second increase since late 2017. The big one though was fourth quarter unemployment holding at a 17-year record high of 29.1%.
SARB’s meeting and rating key in March
The most important news for the rand in March will be the meeting of the South African Reserve Bank on the 19th. The SARB cut rates in January as expected; the consensus at the time of writing is for another cut of 0.25%, which would take the repurchase rate to exactly 6%.
Next week’s crucial data are GDP growth, annual and quarterly, for Q4. The consensus is for a slight improvement in both cases, with the quarterly figure expected to emerge into positive territory, though just barely. Apart from these very important figures, ABSA manufacturing PMI, Standard Bank PMI and SACCI business confidence for February as well as Q4 current account are due next week. For more information, be sure to tune in again on Monday for Exness Education’s weekly data preview.
Further ahead is the estimated date of Moody’s report on South Africa’s sovereign rating on 27 March. Moody’s is the last rating agency to keep South African debt in investment grade. A downgrade to junk, which seems possible, would very likely drive another selloff of the rand. On the other hand, a positive reaction to the budget or recent data might well spur a degree of recovery for ZAR.
Rand could retrace if not recover
While the rand’s fundamentals are overall quite weak, the enthusiasm of this week’s selloff seems to be excessive. Based on recent data and a somewhat positive reaction to parts of the Budget, it’s possible that the rand could recover to a degree against most major currencies next week. However, this would be contingent on Tuesday’s key GDP data.
Thank you for reading Exness Education’s fundamental analysis of the rand! For a fuller picture of important areas going in to next week, be sure to check out this afternoon’s technical analysis of EUR-ZAR.
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