Fundamental Analysis: ZAR’s Gains Slowing amid Weaker Data ahead of the Budget

Fundamental Analysis: ZAR’s Gains Slowing amid Weaker Data ahead of the Budget

The near-record gains made by the rand last month appear to be at an end for now as traders reconsider a string of weaker than expected data releases. ZAR has held close to five-month highs of R13.35 to the dollar, with a similar picture against the euro at R15.26. The rand also reached two-month highs of ¥8.22 on Friday night.

Interest rates, ‘risk-on’ and January’s record gains

According to Bloomberg and various currency analysts, January 2019 was at least a 20-year record monthly drop for USD-ZAR. The South African Reserve Bank’s move to keep the repurchase rate at 6.75%, instead of hiking (or even cutting) as some outliers predicted, did not significantly affect the South African currency last week.

What has given significant support though is the decline in global shares in mid-January, with investors in deliverable assets moving to emerging currencies with higher yields. Further support to sentiment came from the return of ‘risk-on’ at the end of last month and big gains for several other emerging currencies such as the lira. December also had its own record for South Africa: the biggest ever trade surplus recorded for the country, with imports dropping over a quarter from November’s figure.

The dramatic drop posted by various major currencies against the rand — the dollar lost more than R1.20 on the chart last month — is viewed as difficult to sustain for much longer by analysts on the whole. Data last week was the catalyst for ZAR’s loss of momentum: money supply and private sector credit figures missed expectations on Wednesday, and the fairly major decline of -0.9% in monthly PPI limited positive sentiment on the rand to some degree.

Into February and all eyes on the budget

Based on historical data, February is usually a good month for the rand. In this case, fundamental traders are likely to watch political developments more closely than their charts. The central event is the presentation of the Republic of South Africa’s budget on 20 Feb by Minister of Finance Tito Mboweni. While no significant departure from October’s statement is expected, indications of the outlook for planned economic growth are important here.

Rumored shady deals between big business and the ANC during Jacob Zuma’s presidency have also been prominent in the news in South Africa since last week, and the government’s response if any to these is to be noted carefully. No important data is due out from RSA this week, so most traders will be studying possible correlations with other emerging currencies and established equity markets.

Direction for ZAR seems to be up but volatile

Fundamental analysis of ZAR would suggest that ongoing gains are favorable for the rand against major currencies, at least in the runup to Mr Mboweni’s key speech later this month. On the other hand, the rand’s notorious volatility especially against the euro means that the technical picture must not be ignored when trading.

Are the rand’s gains spent? Either way, ZAR’s an opportunity for traders in February!

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