To say that the last couple of weeks have been unprecedented could be the understatement of the year. The Rand has been in a record-breaking mood and not in a good sort of mood. The Rand has broken above the R19.00 level on thin liquidity, and overall risk aversion, as the market still wants to ascertain what the potential fall out is from the COVID-19 pandemic.

 

 

In the past couple of weeks, everyone has written at length about the potential economic consequences of the pandemic, and we have seen data from the US that seem to suggest that we could be in for a hard landing once the full effect of COVID is felt. Areas of concern, apart from the loss of human life, will be global growth, the rapid rate of businesses going under and the overall economic wellbeing of people in general. 

One round of data released last week was the US employment data that already reflected the impact of the virus. Both the jobless claims and the US non-farm payroll numbers showed record lows with the jobless claims printing 6.65m while the job losses reported for March was 701,000.  It would seem however that the market has priced it in as there was hardly reacted to numbers. 

On the non-farm side of the scale, the number snapped a 113-month streak of job growth and while at least a 100,000 jobs were required to continue the longest expansion of US economic growth currently in its eleventh year. The report, however, had some shortcomings with the data not reflecting the total picture due to a nationwide partial lockdown imposed from mid-March onwards.

On Friday evening the Rand surged through the R19.00 level as Fitch downgraded South Africa’s long term foreign currency debt from BB+ to BB with a negative outlook. Fitch cited a lack of a clear path towards government debt stabilisation and the widespread impact the COVID-19 pandemic is going to have on public finances. They expect our GDP to contract by 3.8% in 2020 and this is not good news for an already beaten down currency.

The worrying thing is that the decision was made on the back of the 21-day lockdown, which the government said will not be extended. The question that arises now is what the case would be should the lockdown be extended? This will undoubtedly place a further strain on an already beleaguered economy and could spell more bad news for the Rand. The other fact to be considered is whether SARS can take a further lockdown as limited tax revenue is gained during the lockdown. The result will only increase the level of debt for South Africa, and with the recent downgrades, that will be more difficult to finance.

As if we did not have enough bad news for one week, over the weekend the market received another round of bad news that the much-promised talks between Russia and Saudi Arabia regarding the cutting of oil production were delayed. Oil fell by 12% as markets opened, which placed further pressure on riskier assets but the silver lining concerning the talks is that it is set to continue on Thursday.

On the data calendar, apart from the OPEC meeting on Thursday, we have inflation rates from China and the US out on Friday. We expect that these numbers will not reflect any COVID flowthrough as inflation data usually is lagging.

With this week a short week due to the Easter weekend, we can expect thin liquidity conditions which could amplify moves in the market. With the Rand on the back foot and currently trading in uncharted territory calling a range is nigh on impossible, but as economies get under further strain governments will have their hands forced to weigh up when to open the economy up for trade vs COVID lockdowns. The fact of the matter is that a global recession is upon us, and while we are not sure how significant the potential fall-out could be, the uncertainty in the markets will weight heavily on the Rand.