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Market Analysis

Fundamental Analysis: Dismal Data Sinks the Rand

June 05, 2019
BY Michael Stark

The South African rand has made sharp losses today against most currencies after some very poor data. Manufacturing PMI and quarterly GDP growth were both unusually negative, missing expectations by a significant margin. These figures came in the context of intense disagreements between senior members of the ANC. Ongoing trade tensions have also been affecting sentiment in emerging markets since last week.

Despite a fairly promising start to the week, the rand has now lost over 2% against the dollar since yesterday’s open. USDZAR has moved up sharply from then to around R14.72. The picture has been similar for EURZAR and GBPZAR at R16.56 and R18.70 respectively.

10-year low in GDP growth

Yesterday’s big news for the rand was first quarter GDP growth. This printed an exceptionally poor figure of negative 3.2%, the biggest quarterly decline in South Africa’s economy since 2009. It’s also even worse than Q1 2018’s negative 2.7%, which some analysts asserted was one of the first signs of the selloff in the rand last summer.

Monday’s ABSA manufacturing PMI was also a disappointing release. The consensus indicated a slight improvement from the previous 47.2. However, 45.4 means a bigger contraction in manufacturing.

Mixed signals from politics, but recent nervousness

Business sentiment had generally been quite good last week after the announcement of South Africa’s new Cabinet. President Cyril Ramaphosa chose to retain the Ministry of Small Business Development and South African business organizations also hailed what they see as a focus on economic transformation and management in the new Cabinet.

More recently, though, the focus has shifted to bitter disagreements between senior members of South Africa’s government. Today saw Finance Minister Tito Mboweni and the Premier of the Free State Elias Magashule attack each other publicly over economic policy.

Mr Magashule’s openness to quantitative easing and increasing the Reserve Bank’s powers were highlighted in a speech by Dr Mboweni this morning GMT. The latter criticised the ‘reckless statements’, saying that Mr Magashule is ‘undermining the hard work of Reserve Bank’ and threatening economic growth.

More warnings about trade

Generally speaking, the ongoing Sino-American trade war has had an especially pronounced impact on emerging markets. Today’s news from the International Monetary Fund that China’s growth forecast would be cut slightly worsened sentiment on emerging markets including the rand. China and the USA are South Africa’s biggest trade partners.

Beyond the impact on trade balance, the dollar’s overall gain over the past month affects South Africa’s economy. Most of the external debt held by South African companies is in dollars. These firms have a harder task repaying as USD appreciates.

Data and politics in view for the rand

The two remaining releases of economic data from South Africa this week could have an effect on the rand:

  • Thursday, 09.00 GMT: Q1 current account (consensus R150 billion; previous R110 billion)
  • Friday, 06.00 GMT: foreign exchange reserves, May (consensus $51.5 billion; previous $49.5 billion)

If the consensus is right here, ZAR could find some fundamental support from these figures.

Politics and especially the debate between the ANC’s leaders might be more important. An escalation of the disagreement between Mr Magashule and Dr Mboweni would be negative for ZAR. However, it’s possible that the president might step in to defuse the situation sooner rather than later.

Sentiment in emerging markets generally is also important for the rand. Things could be worse in this area; some currencies like the lira (TRY) have made strong gains this week. However, any plans by the USA for more tariffs or more aggressive rhetoric could mean further headwinds for ZAR.

ZAR could make more losses

ZAR’s fundamentals have been very negative so far this week. This might suggest that the rand could continue to move down in most of its pairs. However, a resolution of recent political strife would probably make the opposite direction more favorable.

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