Johannesburg, South Africa, Image © Adobe Stock
- ZAR lifted across board by signs Chinese economy is recovering.
- Standard Bank says post-election reform to help ZAR rise further.
- But developments around China and USD are also key to outlook.
The South African Rand advanced broadly after official data showed the recent slowdown in Chinese economic growth might be ending, leading to hopes for a stronger global economic outlook over coming months which would tend to benefit the South African economy.
China's economy grew at an annualised pace of 6.4% in the first-quarter of 2019, unchanged from the rate of growth seen in the final quarter of last year, when markets had looked for it to dip to 6.3%.
"This, together with robust growth in industrial production in March, signals that China’s policy stimulus aimed at cushioning the economic growth slowdown is probably effective," remarks Thanda Sithole, an economist at Standard Bank, who have told clients they see further gains in the Rand being possible over the course of the remainder of 2019.
Furthermore, growth in fixed asset investment, industrial production and retail sales all picked up during March, suggesting the world's second largest economy may have gained momentum heading into the second quarter.
"This follows Friday’s trade data, which also came out higher than estimated and adds to the view that growth in the Asian giant may be bottoming – a positive for emerging markets," says Mpho Tsebe, an economist at Rand Merchant Bank.
Above: Pound-to-Rand rate at daily intervals. Quoted -0.31% lower at 18.23 Wednesday.
Wednesday's data has reenforced the idea in the market that "green shoots of recovery" are now sprouting up everywhere around the global economy, except in the U.S. which is still expected to see growth slow this year.
That idea is why the market is looking for the Dollar to weaken this year. A global growth pick-up coming against a backdrop that is characeterised by a U.S. slowdown is expected to see investors selling the Federal Reserve Dollar and buying currencies of other central banks instead.
"We think the broad USD has peaked and should begin declining soon. The are signs that the global economy is not only stabilizing but rebounding are growing, as seen in China PMIs and global trade volumes. Meanwhile US data continue to soften and US nominal and real yields remain under pressure," writes Gek Teng Khoo, a strategist at Morgan Stanley, in a recent note to clients. "DXY faces resistance at the previous high of 97.10."
For the Rand, this is seen translating into substantial support even if a May general election that is now looming over the horizon and South Africa's own domestic ailments risk holding the currency back in both the short as well as medium term.
The Rand was one of the many emerging market currencies to be hurt last year by a resurgent U.S. Dollar and a slowdown in China's economy and, given South Africa's reliance on Chinese demand for its exports, the Rand could benefit from any sustained upturn in the world's second largest economy.
Standard Bank, one of South Africa's largest lenders, says the Rand should do well in 2019 due to domestic reforms of the economy and state apparatus. However, it also cautions that investors should be wary of the currency until after the May general election that is now looming over the horizon.
"The rand is slightly firmer this morning, at R14.00/$, compared to yesterday’s close of R14.02/$. It [USD/ZAR] should trend sideways but perhaps somewhat stronger, ahead of the SA general elections on 8 May," says Standard's Sithole. "We view the rand as undervalued and therefore see it firming after the SA general elections, premised on the expected constructive political and economic reforms. We maintain our rand forecast of R13.40/$ by year-end."
Above: USD/ZAR, down -0.24% at 13.99 Wednesday, with USD/CNH rate in blue.
Sithole wrote to Standard Bank clients at the beginning of April warning "we advise caution" on the Rand ahead of the may vote but also that the passing of the vote, and a Chinese recovery egged on by an anticipated resolution of the U.S.-China trade fight will eventually prove supportive of the currency.
President Donald Trump's tariffs on Chinese exports to the U.S. hurt the world's largest economy last year and stoked the wave of pessimism about global growth prospects that gave birth to the 2019 year.
He said earlier this month that a deal to end the tariff fight is coming but that it might be May before it is finalised. But Sithole is not the only analyst who has at least one eye on events in China.
"South Africa has seen its annual economic growth rate weaken since 2011, mirroring the path of China, not the rest of the world, and evidencing SA’s reliance on demand from China," says Annabel Bishop, chief economist at Investec Bank. "China is a key trading partner of South Africa, and China’s rebalancing has seen a negative impact on SA’s growth."
Investec's Bishop has frequently highlighted the contribution of long-running slowdown in China to South Africa's mear-decade-long period of uninspiring economic growth, although she assigns relative balanced odds to the prospect of the domestic economy being suported by a pick-up from overseas this year.
However, others are sceptical of the nascent Chinese 'recovery' and are already betting against the Renmimbi by through bets on another upward lurch in the USD/ZAR rate, which is not too disimilar to a bet against the Rand and other emerging market currencies. BMO Capital Markets is among them.
"We would characterise the surge in Chinese output as1/3rd technical, 1/3rd seasonal/base effects, and 1/3rd stimulus induced. As such, there are reasons to be cautious here. There are lingering questions over the efficacy of stimulus and the willingness of Chinese policy makers to double down," writes Stephen Gallo, European head of FX strategy at BMO.
Gallo flags that China's economy purports to have seen a pick-up in factory activity, as well as broader industrial output, during the first quarter but that none of this showed up in the initial IHS Markit PMI surveys of Eurozone manufacturing activity during the quarter, which is a suspicious sign given Europe suffered in almost equal measure from the slowdown that began in China's factory sector.
"The Eurozone March IP data and PMI revisions (due tomorrow) could still reflect positive feedback loops from China, but the global trade environment is definitely shifting (i.e., things ain’t like they used to be). All things considered (including tactical risk-reward metrics), we’d rather be buying USDCNH at 6.6870 targeting a move back to 6.7300 than looking to sell the confirmed break of daily trend support (6.6834). But in this difficult environment where FX investors are desperate for new trends, we’d keep our stop losses tight," Gallo wrote to BMO's clients.
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