After the December ex-Minister of Finance Nhlanhla Nene firing hurting us deeply, doubled up in January by another instalment of Chinese liberalization tribulations, the SA Rand and long bond yields ended up in deeply overshot territory. Indeed effective junk. By Cees Bruggemans
There has been some clawback todate, the Rand retracing to 15.80:$ (after seeing 18:$ on a single Japanese midnight cowboy trade) and long bond yields clawing back about half the 160 point Nene loss. Is this it, or is there more potential for retracing? It depends on what you want to believe….
There are two levers that could potentially encourage more short-term Rand and bond yield retracing: disappointing US and global growth performances making for a more dovish Fed inviting Dolllar retracement, and finance minister Gordhan giving us a transforming historic SA budget.
Neither is a given yet, but tealeaves are telling us something could be shaping.
The Fed would not want to be deflected from its main mission, very gradually normalising its policy. That requires continuing steady US growth, labour resource uptake (unemployment easing further) and inflation edging higher.
Yet US growth may remain pedestrian even if the labour gains are steady, while its headline inflation may remain repressed short of 2% for a variety of reasons, as unsettling global tendencies and domestic uncertainty weigh on prospects.
It may make the Fed cautious, just as its data-dependence has always suggested. Markets have weighed all this, and are pricing in the next rate hike only by April 2017. So supposedly nothing this year.
Though hardly yet a given (so much can happen in a year), with the labour data remaining in the Fed’s corner, one has reason to wonder aloud. The latter part of this year will be a no-go zone (the Fed traditionally abstains ahead of elections) and the seven months through to September look increasingly iffy.
If the Fed confirms a pause, this is likely to reverberate strongly through the Dollar market, causing it to give up some of its heady gains of the past 20 months. That would be Rand and SA bond positive.
There were early signs of this already happening last week, markets driven.
But it could get even better if we are two weeks away from a historic SA budget doing what needs to be done. Treasury has for many years been under political oversight demanding adherence to greater causes. Given the crisis conditions of recent times, the loss of political coherence at the top, and the apparent mandate to restore confidence and prevent junk (if possible…), there is an opportunity for Treasury to act in untrammeled ways. What this means we are about to find out.
If it means deeper than expected spending cuts (did the Zille comment last week suggest as much, at least for province allocations?), some tax burden increase (a bit of solidarity perhaps, but Moody’s last week mightily frowning, as now is NOT a good time to raise taxes in a weak economy), and perhaps imaginative use of state assets to raise private finance makes an unscheduled appearance (selling up to 49% of Eskom or displacing government infrastructure financing with private funding, thus freeing up space for decisive budget deficit reduction), our markets could be shaken again, but now in a positive sense. Rand and bond yields still have plenty of leeway to claw back lost Nene (& Zuma) ground.
So is the Rand heading back below 15:$ (or better) by Easter? And long bond yields back below 9% (or better)? It would be magic, wouldn’t? Reminding of rabbits. A combination of global efforts and SA heroism.
Fascinating things, tealeaves.
- Cees Bruggemans is an economist at Bruggemans & Associates
- Email TechFinancials.co.za at firstname.lastname@example.org