Currencies – GDP shocker leaves Rand shaky…

rand

Another week of volatility plagued the Rand, as we saw more wild swings in value over the 5 days…

And it wasn’t just the Rand, as all global markets suffered in the uneasy environment.

Oil was back down again after months on the up, and the Pound took a hammering as the Brexit talks resumed in Britain… and then the Dollar finally trying to recover from its multi-month decline.

It was a mix of global and local triggers, so let’s get into the full review to see what we can take from all that happened during the week…

Key Moments (7-11 Sep 2020)

Firstly, let’s take a look at the biggest headlines from the 5 days:

  • GDP collapse – the 4th consecutive quarter of GDP losses for SA came in at the most destructive in recorded history…
  • Economic Recovery Plan – Saffers have been waiting for months for clarity on this, and finally Ramaphosa provided a timeline on implementation
  • Brexit – negotiation time, and yet again the UK is threatening to leave without any deal as talks didn’t seem very productive
  • US Stimulus politics – the race is hotting up as we have now enter the final stages, which markets will be watching closely…

So let’s get right into it.

Firstly, with the market’s opening on Monday around R16.57 (following the topsy-turvy previous week)… and with the events expected over the 5 days, we were not anticipating the volatility to change anytime soon.

The biggest locally was the GDP report for 2020 Q2 – and WOW, it made for some reading!

The headlines blared: The South African GDP has fallen 51% in 1 quarter!

Mind-boggling… but also not altogether accurate, at least without context.

As Fin24 clarified in their article for their readers, this does not mean that South Africa’s economy ‘halved’ (decreased by 50%).

The detail here is important, as this metric actually means if the growth (or growth loss in this case) were to be projected out at the current rate, over the course of a year, that would be the net result of the economy. So 12 months of lockdown like we had in Q2, would result in a net loss of 51% of the economy.

The reality is that the GDP fell by 16.4%… so while horrific, not quite as dramatic as the headlines like to make it sound.

Different ways of measuring GDP, Q2: 2020

But this showed the urgency of the economic reform promised by Ramaphosa and his administration, as the seriousness of the current crisis is not to be underestimated. Especially when Consumer Confidence is at its lowest level in 27 years

And right on cue, he came out with a commitment to an implementation plan within the next 2-3 weeks, saying SA had entered a “new era”.

He also spoke scathingly of the government’s procurement program for PPE equipment, calling for a complete overhaul. He also was extremely unhappy with only R18-25bn of the R200bn allocated of stimulus having been utilized. Businesses are in need of the money and yet it is not being distributed.

Plenty of details were shared over here… but now, it needs them to walk the talk!

This news was released on Tuesday, and with Ramaphosa’s speech in amongst all of this, the Rand kept up its volatile ride, as we saw wild swings in value:

USD/ZAR

And then in other news:

  • Over in Europe, Brexit was the hot talking point once again as the UK and EU will try to come to terms on two major sticking points holding the trade deal back, namely fisheries and state aid. The UK have again threatened to leave the EU without a deal, with Britain’s top negotiator demanding “more realism”. The Trade talks on Friday hung in the balance as the UK rejected the EU ultimatum, following the UK’s plans to override part of the Brexit withdrawal agreement.
  • Over in the US, Stimulus talks once again failed as the Democrats blocked the downsized Republican proposal, and the gridlock dragged on. It has become a game of politics with the Republicans desperate to get something out both for the American people, and to boost their election chances in November… while the Democrats are keen on blocking anything that doesn’t look like their own ideas and proposal, as they also want to take the credit in view of the upcoming elections. This will be a big one to watch over the next few weeks leading up to the elections, as neither side wants to give an inch.
  • In other economic news, Japan’s economy shrank more than expected, contracting by 28.1% due to the current crisis and decreased consumer spending. Back locally, SA’s current account deficit for Q2 widened to -2.4% of GDP following a surplus of 1.3% in Q1.
  • And then lastly, the chilling report from Eunomix Business & Economics on South Africa, as they put the figures and data into the facts, stating that unless the trajectory changes, SA will officially be a failed state by 2030… and not just a change in trajectory, but a “meaningful” one.

And back to the Rand, we had the local unit continue to zig-zag its way through the week, unable to build any momentum in either direction except against the Pound, which took a beating during the week.

And so the week came to a close around R16.75/$, R19.80/€ and R21/40/£ – and that was the wrap!

The Week Ahead (14-18 Sept 2020)

As we look to the week ahead, there is a mountain of events, with interest rate decision domestically as well as abroad being the likely big triggers for some market movement, along with a slew of other data:

SA – Interest Rate Decision

USA – FOMC Projections, Retail Sales, Monetary Statement, Interest Rate Decision, FOMC Press Conference, Jobless Claims

UK & EU – Interest Rate Decision, Monetary Policy Summary, BoE minutes

So plenty to digest and occupy the market this coming week, apart from all the political and social turmoil that is around.

While the economists of this world will look for market direction based on these events, we will instead be focusing on what matters – what the market itself is telling us and where evolving patterns of sentiment are likely to take us.

The Rand could have a little more steam left to push stronger, but don’t expect it to be one-way traffic if our Elliott Wave based forecasting system is to be believed.

It is likely to be a fascinating week… yet once again.

If you have any questions or feedback, please let me know.

To your success~

James Paynter

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