Rand runs out of steam in lead-up to budget speech

For all the foreshadowing that was done last week in terms of the two big speeches by the head of states in the United States (US) and South Africa (SA), very little happened as a direct consequence thereof.

The addresses have been covered in great depth in the past week, and the most common thread that has come from it is that the two presidents primarily stuck to their respective scripts. President Donald Trump was keen to discuss immigration as well as trade talks with China, while President Cyril Ramaphosa tackled the issues of Eskom, land redistribution, and unemployment, to mention a few.

The reality that Ramaphosa painted was not a pretty one as he acknowledged that the nation is currently facing a lot of problems. Change is necessary in order to save Eskom and the other SOE’s, and investment is necessary in the country to ensure economic growth and employment.  These action points will all form part of the budget speech.

The importance of the budget has increased after the delivery of the State of the Nation Address (SONA). The potential for the rand to lose some ground leading up to and after the budget is a real concern as investors position themselves for a negative budget outcome. Moody's has commented that the split of Eskom that Ramaphosa wants to implement will do little to improve its financial woes.

Apart from the speeches, the real story in the market is the fact that the US dollar is currently on a tear stronger, as economic data out of the Eurozone only seems to confirm that the currency bloc is facing a tough time in 2019.

The odds of the European Central Bank (ECB) starting to normalise interest rates have gotten better and it would not be surprising if the ECB sits on its hands in 2019. There are also some whispers that another round of Quantitative Easing (QE) might be the only way for the ECB to go. If this materialises, it will see the euro losing value and probably go to parity against the US dollar. 

Another reason for the stronger dollar is that the US data has not been that bad in complete contrast to the dovish Fed comments from January. It could be easy to see that the Fed might change its tone should the good data continue. This will also help the US dollar to grow stronger, but mostly at the expense of Emerging Market currencies. In the past week, the rand and its peers ran out of steam. 

Speaking of the rand, it lost ground last week as it traded in the R13.60's at the end after starting the week in the R13.30's. Some rand consolidation was expected as the move down was huge and quite swift. 

We also suspect that investors are positioning themselves for potential rand weakness after the budget speech. Over the weekend we learned that Eskom would again introduce load shedding which generally does not bode well for the rand as load shedding has a detrimental effect on growth. 

Some cracks have started to appear in the rand. In the view of the upcoming economic news and current Eskom situation the feeling is that the rand will drift higher leading up to the all-important budget speech.

To catch up on today’s market commentary, have a look at the TreasuryONE blog which is updated daily.