Published Date: 2020-11-20 | Source: INCE|Community | Author: Rand Swiss | Gary Booysen | Portfolio Manager
The rand feels incredibly strong right now.
Overnight, the local currency sailed through the R15.30/$ level - much to the chagrin of offshore investors, exporters, and technical range traders.
Even heavyweight institutional analysts must be scratching their heads.
Last time I wrote about big bank FX predictions, Investec had published a 1-year target rate of R15.55/$. Not only was it the most bullish of the 27 investment banks polled, but it was about to become the frontrunner in the ongoing and impossible challenge of predicting where the USD/ZAR rate is headed.
The most bearish bank was Swedbank AB at R20.05/$.
But everything changed as the currency dropped out the bottom end of an incredibly wide range of predictions.
Current polls show the number of participating institutions has dropped to 19 as analysts scramble to update their models and recalibrate their forecasts.
Goldman Sachs was an early mover dropping their 12-month estimate to R15.30/$, while the most bearish broker has now become Julius Baer with a one-year target of R18.00/$. Wells Fargo remains the highest ranked forecaster with a prediction of R17.90/$.
Investec has also modified their estimate down to R15.20/$ again making it the most bullish bank polled.
So, what's going on here? What's changed?
As Economist John Maynard Keynes famously said, "When the facts change, I change my mind. What do you do, sir?"
And clearly the situation on the ground is fluid.
Over the US election period the relationship between US politics and the USD/ZAR pair was clear. As Biden and the Democrats looked like achieving a clean sweep, the currency rallied stronger, breaking below R16.00 for the first time in ages. When Trump won Florida and, for a brief moment, it looked like the pollsters had it all wrong, and the Republicans were still in with a shot, the currency bounced to R16.40/$.
The volatility was high as the FX market focused almost exclusively on the elections. The USD side of the pair was leading the price action as the FX rate whipsawed viciously back and forth.
As the Biden victory became more certain (and the idea of a meaty fiscal stimulus package circa $2.2 trillion looked more likely) equity markets rallied, and the "risk-on" trade forced money into risker emerging market assets. The USD/ZAR was a natural beneficiary. The result has been strong foreign inflows into both our bond and equity markets this November.
And then, we had the incredible news that Pfizer and their partner BioNTech had a Covid-19 vaccine which exceeded all expectations in clinical trials. It was 90% effective in preventing coronavirus symptoms. Pfizer stock, already a constituent of the Rand Swiss Global Equity Portfolio, rocketed. And the currency briefly dipped to R15.20/$.
So, what does this mean to you?
While the market euphoria is currently palatable, I would urge you to keep perspective.
I opened by saying the rand feels incredibly strong right now. Over the last six months, the local currency has improved +16.4% against the US dollar. Given where interest rates are currently this is a massive revaluation of emerging market economies and their assets, certainly in US dollar terms.
And while the momentum is clearly in favour of emerging market risk assets as the global recovery takes hold, I'd also like to point out the rand is still -9.64% weaker against the US dollar year-to-date.
Even with the enormous strengthening, you'd still have been better off parking your cash in USD rather than ZAR given the current interest rate differential.
Where to next?
I've already discussed where the big banks have their forecasts.
And, even though I have full view of the Rand Swiss cross border transfer book, in which large volumes of money flow back and forth as private individuals and businesses use our FX desk to achieve superior rates on currency conversion, I would still feel uncomfortable any level of certainty as to the short-term future of the USD/ZAR pair.
What I will say is that we have a few risk events coming up.
Towards the end of the month, it's likely we'll see some of the credit ratings agencies cutting us further into junk. Both Moody's (Ba1) and Fitch (BB) have South Africa on negative outlooks. This means the next move taken by the agency will likely be to cut our credit rating further.
And, while the currency markets may have been focused on the US elections, the ratings agencies were clearly focused on our Medium-Term Budget Policy Statement. There is no indication that enough was said to alter their outlook and it seems to me further downgrades are inevitable.
This Friday, 20th November 2020, S&P and Moody's will be passing judgement as to the sustainability of South African's sovereign debt.
The market doesn't expect S&P (BB-) to downgrade us. But, if they do, you might see a rapid unwinding of the recent currency gains. The expected result will be for S&P to move the outlook from "stable" to "negative".
Moody's, which has been less aggressive than S&P lately, may give us some reprieve. There is a chance they'll wait to see how the government manages its public sector wage negotiations. But given the low probability of a successful wage freeze and the historic inability to reign in public sector spending, it's unlikely South Africa will avoid the downgrade for long.
Personally, I am using the recent rand strength to build up USD and foreign exposure for myself and clients. Our portfolios offshore continue to outpace their local counterparts, even with the sizable recovery we've seen in local markets.
As an Ince reader you too can benefit by diversifying your portfolio. All you need to do is click the following link https://www.randswiss.com/link/ince/
and register your interest on the Rand Swiss website. A representative will contact you shortly to discuss your personal requirements.