Share

Further 'burst' of rand weakness likely

Cape Town - When the US Fed actually hikes rates and the probability increases to 100% there is likely to be a further burst of rand weakness, says Overberg Asset Management (OAM) in its weekly overview of the SA economic landscape.

The probability that the Federal Reserve will hike the benchmark Fed Funds rate on 16th December has risen again in the past few days and now lies at 74%, says OAM.

"The rand fell sharply when the odds of a December Fed rate hike increased from near-zero to 70% following the release of much stronger than expected October non-farm payroll numbers."

Moreover, the rand should weaken steadily once the Fed embarks on a continuous rate hiking cycle.

According to OAM signs are emerging of faster than expected US wage price inflation and it is well known that the Fed is "behind the curve" in raising rates.

"As such the Fed's rate tightening cycle could be faster and steeper than anticipated."

South Africa economic review

• Despite lowering its GDP forecasts for 2015 and 2016 from 1.5% to 1.4% and from 1.6% to 1.5% and its consumer price inflation peak forecast in the first quarter 2016 from 6.7% to 6.4%, the SA Reserve Bank (Sarb) hiked the benchmark repo rate by a further 25 basis.

This is the second rate hike this year following a similar hike on the 23rd July taking the repo rate to 6.25%. Sarb Governor Lesetja Kganyago highlighted that economic growth prospects have dimmed due to weaker construction activity and dry weather conditions which will likely result in the third straight quarterly decline in agricultural output.

While economic prospects remain weak Kganyago cautioned against the second-round effects on inflation becoming entrenched. The Sarb policy statement highlighted that the upward trend in wages has contributed to the persistence of inflation risks.

• Growth in retail sales slowed from 4.0% year-on-year in August to 2.7% in September. Six of the seven major retail categories recorded either slower sales growth or contraction.

The main culprit was the "household furniture, appliances and equipment" category down -4.3% on the year, while on the upside the "general dealers" category grew sales by 4%.

On a month-on-month basis overall retail sales fell by -1.9% the steepest monthly decline since May 2012. On a quarter-on-quarter basis retail sales increased in the third quarter (Q3) by just 1.0% although a slight improvement on the 0.4% growth in Q2.

The outlook for retail sales remains subdued due to pressure on household disposable income from rising inflation, weak employment prospects and high debt levels.

• Consumer price inflation (CPI) increased slightly from 4.6% year-on-year in September to 4.7% in October in line with consensus forecast. On a month-on-month basis CPI increased 0.3%. The main contributors to the monthly increase in CPI were the transport category with vehicle purchase prices up by 0.9% on the month, and food prices which increased 0.6%.

Encouragingly, core CPI which excludes energy and food prices due to their inherent volatility, slowed marginally from 5.3% to 5.2%. Despite the sharp decline in the rand as well as drought-induced food price increases inflation is unlikely to breach the SA Reserve Bank 3-6% target range before the first quarter of next year.

Even then the target breach is likely to be short-lived as the base effect of low comparative figures washes quickly out of the system.

• The SA Reserve Bank (Sarb) noted portfolio outflows in recent months and cautioned that additional outflows could pressure the rand further.

The Sarb reported at its policy meeting last Thursday that net sales of domestic equities by foreign investors have risen to -R25.9bn since the end of August and net sales of domestic bonds to -R5.9bn. August coincides with China’s unexpected devaluation of the yuan which was the catalyst for the latest outflow from emerging markets.

The Fed's expected rate hike on the 16th December may be the catalyst for a further round of emerging market portfolio outflows. Heavy selling by foreign investors of SA's equities lifts the probability of an equity market correction in the near-term.

SA political review

• South African Airways (SAA) announced in parliament a further loss of R648m in the interim financial reporting period. SAA also applied for an additional R4-5bn guarantee on top of the R6.5bn state guarantee which was granted in the last financial year.

Accusations of poor governance at the state-owned enterprise (SOE) center on the chairperson Dudu Myeni who allegedly has close personal ties to President Zuma.

Dissatisfaction at board level is evidenced by several high profile departures including chief financial officer Wolf Meyer who resigned last week and chief strategy officer Barry Parsons who left in July.

There have been seven group CEOs at SAA in the past three years. A recent audit by Ernst & Young to uncover the reasons for continued financial losses at SAA has uncovered major irregularities.

The application for further state guarantees from SAA will test the resolve of Finance Minister Nhlanhla Nene and the ability of the Treasury to hold the line against financial demands from SOEs. Last week Deputy Public Protector Kevin Malunga stated that SOEs are a "cesspit of disgrace".

The week ahead

• Third quarter GDP: South Africa’s economy grew marginally by 0.7% in the third quarter of 2015, Statistics SA announced on Tuesday. 

• RMB/BER business confidence index: Due Wednesday 25th November. According to consensus forecast the business confidence index is expected to improve slightly from 38.0 in the third quarter (Q3) to 39.9 in Q4 although still in contractionary sub-50 territory.

• Producer price inflation (PPI): Due Thursday 26th November. According to consensus forecast PPI is expected to gain slightly from 3.6% year-on-year in September to 3.7% in October lifted by the increase in fuel prices.

Technical analysis

• The rand remains below successive support levels suggesting a continuation in the rand’s depreciation. Although the rate of the rand’s depreciation is accelerating there is no sign yet of panic selling or capitulation. This stage needs to be reached before a reversal in the rand's move can occur.

• The US dollar index is testing a major 30-year resistance line, which if broken will pave the way for further strong gains in the currency.

• Despite the recent uptick in bond yields the long-term JPMorgan global bond index bull trend remains intact, with the yield targeting a new low during the fifth and final wave.

• The US 10-year Treasury yield has broken above key resistance levels of 2.0% and 2.2%. However, there is unlikely to be a major bear trend in US bonds as the deleveraging phase is still in its early stages.

• The benchmark R186 SA Gilt yield is testing support at 8.70% which if broken could open a new target of 9.5%.

• Although recently recovered the MSCI World Equity index broke downward from a rising wedge formation which has been intact since the 2008/09 global financial crisis. It is unlikely that the downward move is over as the correction was too small for a bull market of the magnitude and duration of the 2009-2015 bull market. The downside target for the MSCI World Equity index is 1 400.

• Since the 1950s the Dow Jones and S&P 500 have displayed 7-year up-cycles and the top of the current US equity cycle can be expected in the next year. The next major wave down will complete the 16-17 year secular bear market that started in 2000. The secular bottom should occur around June 2016.

• Although recently recovered the S&P 500 index broke downward from a rising wedge pattern, which is traditionally a trend-changing pattern. The downward trend is likely to remain intact unless the index decisively regains the 2070 level.

A further negative signal is that the Dow Jones Transport Index, traditionally a lead indicator for the broader market, is leading the broader market lower on the downside.

• Brent crude's break below the key $50 support level suggests a continuation of the weakening long-term trend. Copper is regarded a reliable lead indicator for industrial commodity prices and barometer of global economic growth. It has broken below the key $5 000 support level suggesting further downside ahead.  

• Despite recent advances Gold is in a protracted bear market signalled by rapid declines through successive support levels at $1 300, $1 250 and $1 100. Gold’s next target is $1 000 which is likely to be breached before the bear market ends.  

• Although recently recovered the All Share index broke below its bull market support level which has been intact since 2009. The downside target for the All Share index is 43 000.

Bottom line

• The rand was the fourth best performing emerging market currency last week rebounding to its firmest level in two weeks, helped no doubt by the SA Reserve Bank's decision to hike the benchmark repo rate by a further 25 basis points to 6.25%.

• Will the rand's recent solid footing have any staying power? It is hoped that domestic investors will start repatriating the substantial foreign currency gains which have accrued over the past four years of steady rand depreciation. It is also hoped that the growing interest rate differential between SA and other countries including the US will attract foreign inflows.

• Unfortunately any reversal of the rand’s steady decline still seems some way off. The rand has followed a consistent pattern over the past two years, always pulling away from its 200-day moving average versus the US dollar. Any short-term strength in the rand has tended to quickly reverse.

• The probability that the Federal Reserve will hike the benchmark Fed Funds rate on 16th December has risen again in the past few days and now lies at 74%. The rand fell sharply when the odds of a December Fed rate hike increased from near-zero to 70% following the release of much stronger than expected October non-farm payroll numbers.

When the Fed actually hikes rates and the probability increases to 100% there is likely to be a further burst of rand weakness. Moreover, the rand should weaken steadily once the Fed embarks on a continuous rate hiking cycle. Signs are emerging of faster than expected US wage price inflation and it is well known that the Fed is "behind the curve" in raising rates. As such the Fed's rate tightening cycle could be faster and steeper than anticipated.

• Being a key commodity exporting country SA's terms of trade will continue to be undermined by the rapid decline in mining resource prices. The latest data from China indicates further pain ahead for commodity prices, which means the boost to SA's terms of trade from the weaker rand is likely to be neutralised. The rand will have to fall even further in order to restore SA's current account.

• Fitch credit rating agency is likely to downgrade SA's sovereign debt rating in December in line with its "negative" watch. This would bring the rating in line with the other rating agencies, Moody's and Standard & Poor's.

While Standard & Poor's is unlikely to downgrade SA in December there is a danger it may change its outlook status from "neutral" to "negative" due to weak GDP growth, increasing socio-political pressures and growing pressure on the country’s budget.

• While Regulation 28 exchange control guidelines may eventually prompt domestic investors to repatriate some of their offshore investments this seems unlikely for the time being in the absence of a clear catalyst to drive the rand stronger.

For the full report, including a look at international markets, click here.

* Overberg Asset Management (OAM) is an Authorised Financial Services Provider No. 783. Overberg specialises in the private management of local and global discretionary portfolios as well as pension products.

Disclaimer: Information and opinions presented in this report were obtained or derived from public sources that Overberg Asset Management believes are reliable but makes no representations as to their accuracy or completeness. Any opinions, forecasts or estimates herein constitute a judgement as at the date of this Report and should not be relied upon. There can be no assurance that future results or events will be consistent with any such opinions, forecasts or estimates. Furthermore, Overberg Asset Management accepts no responsibility or liability for any loss arising from the use of or reliance placed upon the material presented in this report.



We live in a world where facts and fiction get blurred
Who we choose to trust can have a profound impact on our lives. Join thousands of devoted South Africans who look to News24 to bring them news they can trust every day. As we celebrate 25 years, become a News24 subscriber as we strive to keep you informed, inspired and empowered.
Join News24 today
heading
description
username
Show Comments ()
Rand - Dollar
18.98
-0.2%
Rand - Pound
24.14
-0.1%
Rand - Euro
20.63
-0.2%
Rand - Aus dollar
12.39
+0.2%
Rand - Yen
0.13
+0.3%
Platinum
911.84
-1.3%
Palladium
1,018.92
-4.4%
Gold
2,160.36
0.0%
Silver
25.11
+0.3%
Brent Crude
86.89
+1.8%
Top 40
66,252
0.0%
All Share
72,431
0.0%
Resource 10
53,317
0.0%
Industrial 25
100,473
0.0%
Financial 15
16,622
0.0%
All JSE data delayed by at least 15 minutes Iress logo
Company Snapshot
Editorial feedback and complaints

Contact the public editor with feedback for our journalists, complaints, queries or suggestions about articles on News24.

LEARN MORE
Government tenders

Find public sector tender opportunities in South Africa here.

Government tenders
This portal provides access to information on all tenders made by all public sector organisations in all spheres of government.
Browse tenders