Local investors can be forgiven for thinking the reason for accelerated rand weakness in November is primarily related to SA-specific factors. However, until yesterday, the major influencer driving even developed market currencies weaker was outright dollar strength.
As of yesterday, the dollar had strengthened against the Euro by 3.52%, the British pound by 2.73%, and the Australian dollar by 5.36%. As an emerging market currency, the rand had weakened by 5.27%. It can therefore be inferred that South Africa is certainly not alone when it comes to currency weakness due to the dollar’s rise.
The dollar’s strength has led to expectations that the US Federal Reserve will be forced into a more aggressive unwinding of the extreme monetary stimulus, including an increase in interest rates. This is reflected in comments by Fed members who are concerned about inflation.
Our research partner, Analytics Consulting, notes the rand is likely to remain under pressure as long as the dollar remains strong, and the Federal Reserve is viewed as being behind the curve. However, a change in US monetary policy and increased Covid numbers in Europe have quickly been priced into the dollar/Euro. Consequently, outright dollar strength is not expected to continue throughout 2022.
Meanwhile, the discovery of a new Covid-19 variant in southern Africa, announced yesterday, has sent a wave of caution across global markets. An Asia-Pacific equity gauge was set for the worst slide since March, with Japan and Hong Kong underperforming and travel shares experiencing among the worst declines. The S&P index is currently expected to open 2% weaker today.
“Most emerging market currencies have weakened during November, especially those emerging markets with weak macro-economic fundamentals such as Turkey, Russia, and Colombia. South Africa would fall into that group.”
– Alison Barker, Analytics Consulting FX Solutions
Global News
- Federal Reserve officials have expressed concern about inflation and said they would be willing to raise interest rates if prices continue to rise. The committee that sets interest rates for the Fed has released minutes from the November session where it first signalled that it could be dialling back all the economic help it has provided during the pandemic.
- The US economy slowed to a modest annual rate of 2.1% in the third quarter, slightly better than first reported. Economists are predicting a solid rebound in the current quarter if rising inflation and a recent uptick in Covid cases do not derail activity.
- This comes as initial weekly jobless claims dropped to 199 000 last week, hitting the lowest level since 1969 and beating economists’ expectations of 260 000. The latest weekly data was released a day early because of the Thanksgiving holiday on Thursday.
- Investors have poured almost $900 billion into equity exchange-traded and long-only funds in 2021 – exceeding the combined total from the past 19 years (!) – according to analysts at Bank of America Corporation and EPFR Global. It’s a data point that underscores just how extraordinary and record-breaking this year has been. The combination of cheap money and an economy roaring out of the pandemic set the stage for an enormous rally, with frenzied retail trading and a lack of other good investment options adding impetus to the surge.
- With more than two-thirds of the world’s cobalt production coming from the Democratic Republic of Congo (DRC), the country is taking centre stage as major automakers commit to battling climate change by transitioning from gasoline-burning to battery-powered vehicles. However, the quest for DRC’s cobalt has demonstrated how the clean energy revolution, meant to save the planet from perilously warming temperatures in an age of enlightened self-interest, is caught in a familiar cycle of exploitation, greed and gamesmanship that often puts narrow national aspirations above all else.
- A stockpile of aluminium in Vietnam is big enough to end a global shortage. Instead, it’s a symbol of a rather dysfunctional market. Reputed to be one of the largest stockpiles in the world, it is unlikely to move soon as Vietnam’s customs authorities keep guard over it amid investigations of an anti-dumping probe.
- In other supply bottlenecks, a global shortage of nitrogen fertilizer is driving prices to record levels, prompting North America’s farmers to delay purchases, and raising the risk of a spring scramble to apply the crop nutrient before the planting season. According to the UN, global food prices hit a ten-year high in October, led by increases in cereal crops such as wheat and vegetable oils.
- In China, the country has asked Didi to delist from US exchanges as they are worried about the leak of sensitive data. China’s move raises fears about its technology sector and further regulatory clampdowns. Didi will need to work out precise details of the delisting, subject to Chinese approval.
- Scientists have said that the newly discovered Covid variant, which carries an “extremely high number” of mutations, may drive further waves of the disease by evading the body’s defences. Only ten cases in three countries have been confirmed by genomic sequencing, but the variant has sparked serious concern among some researchers because several of the mutations may help the virus evade immunity.
Local News
- The South African rand – at R16.23 this morning – is at its weakest level against the US dollar so far this year. This represents a discount of 5% to our fair value model, whereas for most of 2021, the rand has traded stronger than our model, which is updated dynamically on a weekly basis. Consequently, we will adopt a more cautious stance to externalising funds at the current exchange rate, although it is noteworthy that, at times, the discount to fair value can widen to as much as 25%, as was the case in April 2020.
- Foreign buying of South African bonds and equities has been under pressure in recent months, reflecting concerns about South Africa’s lack of economic growth and fiscal challenges. It is entirely feasible that this weakness has continued during November as the Reserve Bank started to hike interest rates. South African bond yields have tended to drift higher in recent weeks and have weakened more noticeably in the past week. (Generally, there is a direct correlation between rand directionality and bond yields).
- South Africa’s trade surplus is not as vibrant as it was earlier in the year. This reflects some increase in imports, but also a moderation in exports earnings. This reinforces the conservative stance of the SARB and Treasury that the country cannot depend indefinitely on a commodity price windfall.
- Business confidence levels took a knock from 50 to 43 points in the third quarter, according to the RMB/BER Business Confidence Index. This is mainly due to the third wave of Covid-19 infections, the unrest in KwaZulu-Natal and Gauteng, together with transport delays, shortages of inputs and insufficient stocks.
- Momentum Metropolitan Holdings’ operating profit fell by 63% in the three months to the end of September due to a proliferation of death claims that contributed net mortality losses of R327 million; this “after taking into account the release of R1 billion of existing Covid-19 provisions”.
- Tsogo Sun Hotels released its unaudited interim results for the six months to the end of September. It said occupancies and rooms sold are still far below pre-pandemic levels. No interim cash dividend was declared.
- In the upset of upsets this week, the EFF voted with the DA and propelled it into government in the country’s big cities, other than eThekwini. Critically, this should not be construed as DA supportive, but rather a strong stand against Cyril Ramaphosa’s presidency, policies, and support base. Malema retains close links with the Radical Economic Transformation (RET) faction of the governing party. This is likely to have significant impact on next year’s ANC electoral conference and the national elections in 2024. More analysis on this development can be accessed in yesterday’s Daily Maverick.
Sources: Dynasty, Reuters, BusinessLive, News24, Bloomberg, Analytics Consulting, The New York Times, The Guardian, CNN, CNBC, etc.
