By Andre Botha, Senior Currency Dealer at TreasuryONE
As we enter the third week of lockdown in South Africa, there are a lot more questions than answers. Most of the answers are also only guesstimates at best as we plot the chart as we go along, and market reaction will become more reactionary as forward-looking.
This reactionary notion in the market has already seen wild volatility in the market with the Rand trading like a yo-yo last week. The Rand traded in an R1.50 range last week, which shows the level of uncertainty is in the markets at the moment. The same can be said for the movement in the equity markets that are on the same rollercoaster as Central Bank moves over this period have been an almost daily occurrence.
Internationally the Coronavirus has been the overreaching item on the agenda that has influenced the global economy. The response to the Coronavirus will, in effect give us the picture of how the global economy will look post the extensive lockdowns, and other measures instituted all over the world. Both Oil and the Fed are two of the leading players that have been affected by the lockdowns, and economic downturns and both have responded in turn on how to stabilise markets.
With global demand down by roughly 30%, due to the Coronavirus, producing Oil at current production volumes would lead to a massive oversupply in oil, and we have seen the price tanking on markets anticipating such an event. Over the long weekend, we saw the worlds biggest oil producers OPEC+ agreed on Sunday to cut production by 9.7 million barrels per day. The initial market reaction was for oil to jump by over $1, but gains were capped as the market felt it was not enough to stop the oversupply in the market. The market is betting on lower oil prices as no cuts will be sufficient to compensate for the overproduction that happened in the last month and a half.
On the other hand the US Fed, in the wake of bad economic data (initial jobless claims), announced a series of programs aimed at big, smaller businesses and households alike that would represent $ 2.3 trillion in economic stimulus. This is the latest in a long line of interventions the Fed has made in the past month to try and soften the blow dealt by the Coronavirus.
The last intervention has brought the total of liquidity provided by the Fed to $ 6 trillion since the first intervention less than a month ago. This intervention is much bigger than what the Fed did during the financial crisis of 2008-9. One key difference in the last intervention is that the Fed can now buy corporate bonds from “fallen angels”, which means that the Fed can now buy junk bonds.
Locally, we had the SARB do something out of the ordinary when that announced a 100 basis point cut of the South African interest rate. This has reduced the interest rate to 4.25%. The move caught markets unaware, and we have seen the Rand losing around 30 cents in the aftermath of the announcement as a lowering of interest rate typically brings a weaker currency to the fore due to the reduction of the yield curve. Looking at numbers released from the SARB the most eye-catching one is that the Central Bank expects the South African economy to shrink by 6.1% in 2020. Depending on the duration of the lockdown, this number could vary significantly.
The most important data set out this week will be the Chinese Q1 GDP out on Friday. This will place a number on the effect of the Coronavirus, with China at the frontline of this disease during the first quarter. Some other interesting data out this week will be the Retail sales out of the US out tomorrow (Wednesday), which will be another indicator of the effect of the virus. The short of it is the ship veered badly off course during the storm and will take longer to get back on track again.
For further developments on our beaten-down local currency, we will need to keep a close eye on how things unfold in the developed world with regards to the Coronavirus. The ZAR feels very unloved at this stage, but only a change in world sentiment would help the ZAR recover. For now, cover your short term risks as the volatility that is around will likely continue.