IT WAS another classy week from the rand, showing its strength as it traded in a small range, but holding strong once again.
A small range of 24 cents was all that separated the high and the low for the week. And considering how volatile a week it was, this was quite something.
After coming off #Zexit, SONA 2018 and the budget, the latter half of this week was a good time to reflect on the month of February and where we expect to be heading in the balance of the year.
Our forecast from Friday indicated we still had to head lower before we could bottom out in the target area before pushing higher...
We saw some more key moments this week, with some of them being:
- Budget 2018 - a 'tough but hopeful' budget from Gigaba was delivered on Wednesday, and definitely painted rather a barren picture of the situation. However, there were a lot of 'promises' and 'ideas', without a lot of plans to make it all happen - and of course a notable 1% VAT increase.
- Credit ratings - has South Africa done enough to avoid a downgrade from Moody's rating agency?
- SONA - different reactions to SONA were very positive from business bodies, despite some seemingly unattainable promises.
- SARS Tax inquiry - Ramaphosa's anti-corruption efforts continue as SARS announces its cooperation with the tax inquiry.
- Mining Charter case - the controversial case was put on hold for the time being.
To get onto what we saw this last week:
It was an important week from many aspects. The reaction to Friday's SONA speech was expected, and then just as that was dying down, it was going to be time for the Budget Speech on Wednesday, from South Africa's Candy Crush (Android & iPhone game) champion Malusi Gigaba (see image below for Candy Crush credentials).
His Budget Speech was expected to be crucial in many ways:
- Finding additional funding from somewhere, as the government needed to make up a budget deficit of about R50bn.
- Cutting government spending so as to not enlarge that number.
- Not increase tax too much, for fear of hurting SA's credit rating, as per the warnings in the build-up to the event.
- Free higher education - was it going to happen, or was it just a Zuma idea?
And then, when he attempted to achieve all of those, he would have to wait in anticipation of the reaction from Moody's, which was expected towards the end of the week, or early the following one.
He would be hoping that Ramaphosa's plans, such as the 10 ways he wants to revive the economy as published by Fin24, would provide confidence to ratings agencies.
The general feeling was that SA should just be able to avoid the downgrade, but not by much.
And this was the opinion of Andrew Rissik of Sable Forex too, as well as myself, when we hosted our webinar on Thursday, going over these points.
Budget day arrived, with the following items being announced:
- VAT increase from 14% to 15%;
- Higher fuel levies;
- Rise in alcohol and tobacco tax;
- Estate duty and donations tax – estates exceeding R30m will be taxed at 25% instead of 20%;
- Free higher education; and
- No fiscal drag adjustment for higher income brackets.
The rand reacted and went as far as touching R11.57/$, with three-year lows being tested... incredible!
But this was expected, per our forecast on Wednesday which showed we still had a little to go, with a break below R11.56 expected before we could see a bottoming out.
Until Friday, the week was rather choppy, and only on Friday did we see the rand break into our target area for Wednesday's forecast.
We feel a bottoming out is imminent, and some others are starting to feel that way too - such as this piece from Fin24, where the writer questions whether the supposed 'Ramaphosa Party' is over for the rand.
While this is a very economist-type outlook, the charts are showing that we are in for some surprising times in the next two to three months.
* James Paynter is a financial market analyst and founder of Dynamic Outcomes. Opinions expressed are his own.