South African Rand Takes Cues from Offshore Factors, New Eskom CEO No Game-changer

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- ZAR advances as market digests Eskom CEO appointment.

- But bond market and Monex say new CEO no game-changer.

- ZAR gains as currency traders chase 'risk assets' higher. 

- And USD cedes ground to all other than safe-haven rivals.

- Trade war newsflow still key to outlook, and is souring again.

The Rand advanced against major currencies Tuesday amid a supportive environment for risk assets and after Eskom named a new chief executive, but the appointment is no game-changer and the U.S.-China trade talks remain the dominant driver of the outlook, analysts say.

South Africa's Rand was seen rising throughout the Tuesday session while the local news agenda was again dominated by the ailing electricity monopoly Eskom, which has appointed Ampak chief Andre de Ruyter to lead it from January. Eskom is the single greatest threat to the public purse and the country's 'investment grade' credit rating.

Eskom has been without a CEO for months and Moody's, the last remaining major agency to still rate South Africa as an investment grade prospect, has said repeatedly that a credible turnaround plan is key to whether the country retains its coveted status. S&P and Fitch have long cut theirs to 'junk' and if Moody's follows suit some investors could be forced into selling their government bonds, potentially leading to large outflows from the Rand. 

"While the appointment of Andre de Ruyter as Eskom CEO knocks off one of the tasks, the list remains substantive before foreign investor sentiment begins to show a substantial reversal for South African assets. Now Eskom has a new CEO, it is onto the next task – restructuring the state owned entity and its crippling pile of debt. De Ruyter’s CV doesn’t boast similar achievements. Fixed income markets have latched onto that fact too; the yield on Eskom’s 2021 USD bond jumped the most since early October this morning," says Simon Harvey, an FX analyst at Monex Europe. 

Above: Pound-to-Rand rate shown at hourly intervals, alongside USD/ZAR rate (orange line, left axis). 

Price action in the Rand Tuesday might suggest de Ruyter's appointment was welcomed by investors but prices of Eskom bonds told a different story, with the 10-year note maturing in 2021 dipping more than 1% in morning trading. The Eskom Holdings SOC 5.75% 26 Jan 2021, USD note was down more than 1% in the early hours of trading but quoted just 0.51% lower, around 101.13, by Saxo Bank during the noon hours.

"The recent government bailout gives de Ruyter a timeframe to work within, but two years may be too limited given the task and the bureaucratic waters needed to be navigated to restructure the company substantially," Monex's Harvey says. "More worrying is that Moody’s time frame is likely to be even shorter than that."

The fact Eskom's bonds sold off on the announcement suggests investors are less than thrilled with the choice of new chief executive, which was announced as strike action cripples South African Airways (SAA).

The national flag carrier is another albeit lesser burden on the public purse. Job cuts and outsourcing of some functions, among other things, were deemed necessary to put the company on a sustainable footing but they've drawn strike action which is further imperilling the company's future.

President Cyril Ramaphosa and his government are working against the clock to put South Africa's various SOEs on a sustainable footing and in a manner that reduces their burden on the public purse, but doing this to the extent necessary to satisfy Moody's is a tall order and a task at which the government has so-far failed. It remains to be seen if de Ruyter will bring anything new to the table but the government's proposals have lacked detail thus far. 

Above: Pound-to-Rand rate shown at 4-hour intervals, alongside USD/ZAR rate (orange line, left axis). 

"The broad USD is trading little changed towards the end of the London morning; the greenback has tended to outperform other "safe haven" currencies (JPY & CHF) as global risk assets have rallied and USD yields have moved higher, while the more "pro-cyclical" currencies in G10 (AUD, NZD, SEK) have outperformed the USD. The RMB is also trading moderately higher vs the USD," says Stephen Gallo, European head of FX strategy at BMO Capital Markets. 

Price action in the market for Eskom bonds suggests the Rand's Tuesday gains could have been driven more by Dollar weakness and offshore factors than anything else. The greenback ceded ground to all its major rivals Tuesday other than the safe-haven Japanese Yen and Swiss Franc. 

Currency markets were trading in a risk-on manner while stocks were higher across the globe, indicating a supportive environment for the Rand. However, that perception is challenged by lower bond yields and lower oil prices, although the latter is no bad thing for the Rand because South Africa is an oil importer.

This is after President Donald Trump said via his Twitter feed that he's again made his objection to current Federal Reserve (Fed) interest rate policy known to Chairman Jerome Powell, with the White House still incensed that its borrowing costs are higher than those paid by other countries, notably some European countries that have negative interest rates.

BMO's Gallo says what matters most for the direction of the Dollar and markets in general over the coming weeks, is progress in the U.S.-China trade talks. 

Above: USD/ZAR rate shown at daily intervals, following the broad Dollar Index (orange line, left axis).

"The supposed confrontation between Powell and Trump on negative rates yesterday could slightly lift the importance of tomorrow's October FOMC meeting minutes. Still, as mentioned yesterday, this week (and the next, and the next, and the next) are really all about trade headlines. Investors want to know once and for all if the "price [of risk assets and the USD] is right," Gallo says.  

CNBC reported Monday that China's government is pessimistic about the prospect of finalising a 'phase one deal' because the White House is apparently reluctant to remove tariffs recently imposed on goods imported from China. It remains the case that new tariffs will be imposed on all of China's remaining annual exports to the U.S. on December 15, although it was hoped that an October 11 'in principle' agreement would ultimately avert those levies. 

"A risk that could jeopardise a trade deal is if the US government passes the Hong Kong Human Rights and Democracy bill into law. In mid‑October, the US House of Representatives gave the bill the green light," says Elias Haddad, a strategist at Commonwealth Bank of Australia (CBA). "The US Senate is expected to vote on the bill as soon as today. To become law, the bill must get the go ahead from the US Senate and be signed by President Donald Trump."

The U.S. and China said in October they'd reached a deal to avert further hostilities but it's never even been written up on paper, much less officially entered into. And Trump's language on the subject has changed of late. He said on October 11 "we’ve come to a very substantial phase one deal" but since then has increasingly said only that such a thing "could be reached". And he threatened last week to raise tariffs "substantially" if a deal is not struck.

Above: Pound-to-Rand rate shown at daily intervals, alongside USD/ZAR rate (orange line, left axis). 

"China appears set on trying to ‘wait Trump out’, which was a meme we heard earlier in the trade war, rather than pinning its hopes on a “phase one” deal – of which we have been highly sceptical from the get-go," says Michael Every, a strategist at Rabobank. "If Trump gets wind of the fact that China is ignoring him, or even has the perception Beijing is working against him politically, it must surely raise the risk of higher US tariffs--at least on 15 December--rather than the risk-on imminent decrease so many have said so loudly for oh-so long." 

There's plenty of scope for increasing tensions to weigh on the Rand up ahead because with protests having escalated markedly in Hong Kong in recent weeks, the White House is under pressure from Senate Republicans to speak up in defence of the city's youth, who've become increasingly reluctant to accept their lot. Senate Republicans will be key to whether or not a controversial bill clears Congress and is foisted upon President Trump for signing this week.

The bill would sanction some officials, among other things, in retaliation for China allegedly undermining Hong Kong's 'independence'. Passing the bill could enrage Beijing, which would likely see it as foreign meddling in its internal affairs, and might also put a stop to the trade talks. That would be bad for the Rand because it's negatively correlated with the Dollar, which has tended to rise with hostilities between the world's two largest economies.

China’s National People’s Congress appeared poised to overrule the High Court of Hong Kong on Tuesday, which could further inflame tensions between the authorities and protesters, after the latter determined that an executive ban on face masks was unconstitutional. This appears to be the first time Chinese officials have so overtly attempted to assert mainland statutes in Hong Kong which, if true, might be seen as provocative in Washington.

"With the situation in Hong Kong still extremely tense, there has been another dramatic development. Yesterday saw the High Court rule that the Hong Kong government’s use of colonial-era emergency laws to ban the wearing of face masks was unconstitutional...this morning China’s National People’s Congress has stated that “China’s constitution and the Basic Law jointly form the constitutional foundation of Hong Kong," says Every, who's based in Hong Kong. "Beyond the response on the ground in already-troubled Hong Kong, this obviously opens up another potential market risk." 

The Wall Street Journal has more on the potential implications for Hong Kong.

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