James Mckeown, director of Domisa Treasury shares weekly market updates, along with his current view on the South African market.
Levels at the time of writing: USD 17.62; EUR 19.62; GBP 21.88
- QE in South Africa: on Wednesday, the SARB stated that it would purchase an unspecified quantity of government bonds in the secondary market, in order to improve liquidity. This is unusual for a high-yielding Emerging Market. Given that South Africa’s budget deficit had been expected to rise to a 3-decade high of 6.8% prior to the Coronavirus outbreak, the SARB arguably had little choice but to embark on this program, particularly with bond yields in South Africa rising sharply as risk sentiment deteriorated. On announcement of the program foreign investors posted the largest net purchases of SA debt after a month of significantly reducing exposure
- Risk perception and volatility remain highly elevated: US jobless claims data for the week ended 21 March hit an all-time high of 3.3mn, reflecting the extent to which the COVID-19 pandemic has brought economic activity in the world’s number one economy to a grinding halt. The lack of meaningful real-time data on the pandemic and its economic impact is fuelling explosive levels of risk aversion, particularly in riskier Emerging Market assets. Price discovery remains elusive
- USD weaker, ZAR underperforms: the rand was one of the worst performing EM currencies trading down against a much weaker USD, following US jobless data. This was due to concerns over SA entering national lockdown and the pending Moody’s credit review
- Moody’s Rating: on Friday evening Moody’s finally joined the 2 other major rating agencies by downgrading SA government debt to sub-investment grade (“Junk”) status. This was inevitable with negative watch having been in place, already significant fiscal challenges prior to the COVID-19 pandemic and the additional economic impact of the pandemic itself. The only question was whether Moody’s would actually issue an update given global circumstances
- Market reaction to downgrade: whilst USDZAR sold off to 17.63 in late trade on Friday, the full market reaction to the downgrade will be evident this coming week. Given that Moody’s are the last of the 3 agencies to downgrade, the degree to which foreign funds have already sold SA assets as a result of the pandemic and SARB’s QE backstop, the downgrade is unlikely to be material
- ZAR remains deeply oversold: along with SA assets in general ZAR remains deeply undervalued. Bond yields north of 10% and ZAR at current levels will not last once appetite for risk re-emerges. The stampede into the perceived safety of USD has slowed with the dollar trading weaker against most global currencies in the past week, on the back of a $2trn economic support package from the Federal Reserve and verbal commitment to virtually unlimited future support should it be required. Global economic damage from the pandemic is extensive, of that there is no doubt. The extent and duration of this damage are key inputs to the market being able to efficiently price risk. Be on the lookout for a catalyst in these areas that will bring increased calm to the markets and trigger a global recovery
- South Africa & ZAR remain fragile: volatility and weakness will stay in the very near term.
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