The South African Rand will Rise Further, but Buyers Beware says Credit Suisse
- Written by: James Skinner
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Image © Adobe Images
- ZAR surges 2% against GBP and USD in a risk-supportive market.
- Credit Suisse says USD/ZAR to "mean-revert" even further from here.
- But buying ZAR a bridge too far as retracements can "reverse quickly".
The Rand surged on Tuesday in response to a cocktail of events that acted like an adrenaline shot in the arm for so-called risk assets and could have further to run, according to analysts at Credit Suisse, although they also say that buying the South African currency is a bridge too far for them.
South Africa's Rand rose by 2% against both the Pound and Dollar Tuesday, with the rally ignited by European Central Bank (ECB) President Mario Draghi, who hinted during the morning session that fresh interest rate cuts and more quantitative easing could be in the pipeline for Europe.
The suggestion, made in a landmark address to the ECB's Sintra Forum on Central Banking, means monetary support for the struggling Eurozone economy is on the horizon. The Eurozone is a significant trading partner of South Africa and the developed world's weakest economic link.
Any such action from the ECB would offer some hope of an economic pick-up in Europe but would also risk driving capital out of the Eurozone and into other higher-yielding assets, like those in South Africa and other emerging markets.
"The lower rates in the high-income countries are reigniting the yield hunt into emerging market and helping to lift the liquid, accessible and volatile currencies, like the South African rand and Turkish lira. East and central European currencies are being dragged lower by the euro," says Marc Chandler at Banockburn Global Forex.
Tuesday's speech from Draghi was followed by statements from President Donald Trump claiming that he will meet with his Chinese counterpart on the sidelines of the G20 conference set to take place in Osaka in late June.
Had a very good telephone conversation with President Xi of China. We will be having an extended meeting next week at the G-20 in Japan. Our respective teams will begin talks prior to our meeting.
— Donald J. Trump (@realDonaldTrump) June 18, 2019
Above: USD/ZAR rate at daily intervals, alongside Pound-to-Rand rate (orange line, left axis).
President Trump has been threatening to impose a 25% tariff on the remaining $300bn of China's annual exports to the U.S. that have not already incurred levies if his counterpart does not agree to sign up to a deal that Chinese negotiators previously backed out of.
Trump lifted from 10% to 25% the tariff charged on $200 bn of China's annual exports to the U.S. back in May, after Chinese negotiators backed away from an agreement they'd spent some five months drafting with the U.S.
The inevitable Chinese retaliation and subsequent descent into a bilateral spat that saw both sides threatening each other with company blacklists had stoked market fears for the global economy and pushed the safe-haven Dollar higher while driving the Rand and emerging market currencies into the ground.
"We look at last week’s spike in USDZAR and the retracement so far this week in the context of USDZAR tendency in recent months to mean-revert. We conclude that the broad global risk-on environment has the potential to take USDZAR back to the 14.45 area" says Nimrod Mevorach at Credit Suisse.
Mevorach has analysed price action in the USD/ZAR rate over recent months with a view to assessing how much further the Rand is likely to rise now that it's recovering from the losses seen in May and early June.
Above: Credit Suisse calculations of ZAR spikes and retracements since September 2018.
"We suspect that the improving global risk-sentiment (with S&P500 heading higher this week on the back of the resolution to the US/Mexico spat) and lack of meaningful follow-up to the rand-negative events of last week are the main reasons for the relief rally in the rand in the most recent days," Mevorach adds.
South Africa's Rand fell steeply against the Pound and Dollar in June after the economy was shown slowing much further than was previously thought in the first-quarter and following a threat by President Trump to impose tariffs on goods imported from Mexico due to a dispute over illegal migration.
The tariff threat stoked fears that the White House might be willing to fight a trade war on multiple fronts, which was a cause for concern in the financial community because Trump is threatening tariffs on EU car exports if Brussels doesn't lower its own tariffs and provide U.S. farmers access to its agricultural market.
But the Mexican tariffs have since been called off and markets have become enthusiastic in betting the Federal Reserve will soon cut its interest rate. Fed rate cuts would provide relief to the Rand, which saw capital flee and was clobbered with higher funding costs in the last 18 months due to rising U.S. interest rates that drove the Dollar higher.
However, and as much as the currency might be expected to further "mean-revert" over the coming days, the Credit Suisse team say that betting on the Rand would not necessarily be the best idea.
"Our mechanical exercise of looking at USDZAR patterns from the past few months also shows that although retracements tend to be powerful they also sometimes reverse quickly," Mevorach says, in a note to clients. "In other words, this analysis suggests that it would not necessarily be attractive to fade spikes in USDZAR from here if USDZAR changes course again."
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