2016-05-25
It happened a lot quicker than expected. After a benign spell lasting all of four months during which the Fed seemingly capitulated to market wishes (lowering its expected rate trajectory), China data behaving itself and its policymakers supportive, and SA recovering from 9/12 Nene-gate with an apparent check-mated President Zuma, all these weather vanes turned simultaneously.
So far it has been like entering, and now exiting, the eye of a particularly nasty hurricane.
First the perfect storm since mid-2013 originating with the Fed starting to think about bond buying tapering (how quaint that phrase now sounds), followed up with an abrupt Dollar liftoff in 2014-2015, reinforced by two major episodes of Chinese financial turbulence (stock market & Yuan currency centred), with throughout doubts about Chinese growth downside, topped off with a coup de grace a la Zuma (Nene-gate) and a midnight Tokyo cowboy making the Rand see 18:$ in the opening moments of 2016.
I mean, no fiction would convince of its possibilities, but real non-fiction it is.
And then just as abruptly all these forces died down, just like in a real hurricane when breaking through to its eye where a deceiving calm prevails. And just when we were getting used to this benign becalming, with Zuma apparently on ropes, markets discounting the next Fed rate hike by only 3Q17, Dollar on the backfoot and China appearing to have its act together, it was time to re-enter the storm.
As had been amply warned throughout, when the Fed saw some data warming up, seasonality a problem with US winter data but giving back in spring and summer, and US inflation about to leave high energy price base effects behind (and energy prices having bounced these past three months), the Fed suddenly came out of its slumber last week, a hawkish tone to its deliberations.
June is still in play (with not everyone trusting Brexit and its potential exporting global mayhem, even as bookmakers and markets think they will stay in), but 27 July is shaping ever hotter. After that a quick nap to let the Trump/Clinton crowd tear each other apart, and then one more closing rate hike in December, thereby delivering the two rate hikes kind of promised for 2016?
The Dollar has been bottoming since mid-April, with shorts reducing. The real push came in recent weeks. And this having further to run to year end, with half European bond yields negative, capital spilling into the US markets, and the Fed raising rates. Consider US 2yr notes yield +0.9%, Germans -0.5%, a differential of 1.4% in America’s favour. Go figure where the money is fleeing as the US market finally starts pricing in the Fed (even if hesitantly).
If this weren't enough, doubts about China have reared again, as regularly of late (growth downside once recent stimulus ends).
And then there are the many ways some SA rent-seekers are conspiring to be rid of finance minister Gordhan, immaterial of whether this sinks credit ratings, the Rand, bond prices and much else. The national interest doesn't seem to feature. What are these people smoking? The weed, it turns out, is greed.
If the Rand range so far this year has been 14-18:$, now back in mid-range near 16:$, with another seven months to go, and the forces driving us along pretty impressive, with possibly a junk downrating a fact before yearend, it suggests a wide Rand risk cone. At least 16-20:$ for the second half, possibly more if sign-posted events intensify, possibly less if we encounter era change after August.
The next lull in the storm may be as far out as 2019 (if the Fed gets its teeth into things, China isn't finished with us, and neither is Zuma). That is a long runway for an exposed country to invite markets to do whatever it is markets do to prospective roadkill.
SA could of course have a surprise up its sleeve, and checkmate the Zuma crowd once again. If that were to happen, it will all depend on the outcome as to how forgiving and how attracted markets might respond. Impossible to predict.
So within a global cone of Rand uncertainty, we could either see reinforcement of Rand weakness if our politics stay confrontational, as compared to easing the Rand discount as domestic risk recedes.
This offers a 14-24:$ range through mid-2017? Too wide for business purposes, I know. But then do complain to the management, will you. Join any protest of your choice. Make your vote count, whatever you do.
Cees Bruggemans
Bruggemans & Associates, Consulting Economists
Website www.bruggemans.co.za
Email economics@bruggemans.co.za
Twitter @ceesbruggemans
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