What's happening with the Rand

The rand has had a plethora of domestic catalysts for weakness as of late. Weak economic growth coupled with leadership issues in state-owned enterprises (SOEs), as well as a dovish central bank and a rebalancing of the MSCI emerging markets index have been amongst the reasons for the softening ZAR (in the short term).

Q1 GDP a miss

South Africa’s economy (as noted by Statistics South Africa’s) contracted by 3.2% quarter on quarter (q/q) and was flat when compared with the first quarter Gross Domestic Product (GDP) data of the previous year. While a q/q contraction was expected, the extent thereof was not. A consensus of estimates had predicted a negative growth rate of around -1.4% q/q. The worse than expected GDP figure now suggests that South Africa may struggle to achieve the 1.1% annualized economic growth figure recently forecast by Treasury, with 0.7% to 0.8% growth perhaps a more realistic projection for the year ahead.

The below graphic shows emerging market currency moves against the dollar a few hours after the GDP release.

The USD/ZAR weakness was significantly more than that of fellow emerging market currencies, a trend which has continued in the days which have followed.

SOE uncertainty

Adding to the domestic currency woes, has been further surprise developments in heavily indebted state-owned enterprises (SOEs), South African Airlines (SAA) and Eskom.

Eskom Ceo, Phakamani Hadebe’s has resigned due to ‘health’ reasons, although the abruptness of the resignation (after a relatively short time at the helm) raises questions around the legitimacy of the motive given for leaving. SAA CEO Vuyani Jarana has also resigned, citing a lack of government support, to implement a turnaround strategy, as his primary reason for leaving, perhaps a more forthcoming motivation for his departure.

The resignations which were both abrupt and absent of contingency, have left investors wondering if there is more to the SOE’s stories than meets the eye. The uncertainty is equating to further volatility and weakness within the rand.

The SARB

The South African Reserve Bank (SARB) has kept lending rates unchanged (as expected) at the end of the recent Monetary Policy Committee (MPC) meeting. The decision was however not unanimous, with two of the five MPC members voting for a 0.25% cut in lending rates. Lower revisions on the GDP and inflation forecasts, set a more dovish tone to the meeting, with the suggestion that lending rates could be cut by 0.25% before the end of the first quarter in 2020.

The suggestion of monetary easing sets a further bearish tone for the rand which combines with poor economic growth as negative catalysts for the currency.

State of the Nation

President Cyril Ramaphosa will give the State of the Nation address on the 20^th of June 2019. The address finds increased validity in the wake of weak GDP data and unexpected developments at South Africa’s SOE’s. Investors will be looking to hear more about how the president will address recent developments at Eskom (in particular), the contingency plan and the state of progress around the ailing power utility’s restructuring program.

The USD/ZAR

The 20, 50 and 200-day simple moving averages (20MA, 50MA and 200MA) show the short, medium- and long-term trends for the USD/ZAR currency pair as up. The Stochastic on the other hand is suggesting that the USD/ZAR has moved into overbought territory.

These indications suggest that perhaps a short-term decline (dollar Weakness/ rand Strength) is nearing before longer term gains are renewed (dollar strength / rand weakness) i.e. a short-term correction from the uptrend may be nearing before its eventual resumption.

Trend followers may see a correction, should it occur, as an opportunity to find long entry into the currency pair (not a shorting opportunity against the prevailing uptrend).

R15.05/$ remains the favoured upside target for the USD/ZAR currency pair. A break above this level, confirmed with a close, would see R15.40/$ as the next upside resistance target.

Traders hoping for a correction before the longer-term uptrend is resumed, might look to find long entry from around the R14.50/$ (horizontal support) to R14.40/$ (trendline support) levels.