- GBP/ZAR steadies Wed but risks third straight weekly loss.
- As market attention turns to Ramaphosa's Thursday SONA.
- SONA a risk and opportunity for ZAR ahead of 2020 budget.
- Market response key to short-term trend in GBP, USD Vs ZAR.
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The Pound-to-Rand rate steadied on Wednesday and is now looking to 2020's state-of-the-nation (SONA) address from President Cyril Ramaphosa to avert what risks becoming a third consecutive week of losses.
South Africa's Rand was on course for a third successive gain over the Dollar on Wednesday but ceded ground to Pound Sterling, which was itself back in demand alongside other risk assets as market concerns about the global economic fallout from the coronavirus in China continue to ease.
The Pound-to-Rand rate had until Wednesday wallowed in yet more losses that left it appearing as if a third consecutive weekly decline was all but in the bank, although President Cyril Ramaphosa's 2020 SONA address is now looming and presents both a risk as well as opportunity for the South African currency.
Ramaphosa will deliver as leader of the republic his second annual appraisal of the government's lot on Thursday and markets will listening closely for signs that he and his cabinet are making progress in agreeing structural economic reforms as well as a plan for putting Eskom onto a sustainable financial footing.
"The substantial economic reforms detailed in National Treasury’s 2019 growth plan have not been implemented," says Annabel Bishop, chief economist at Investec. "With government debt projections high and climbing in South Africa as a % of GDP, particular market focus will centre on Eskom. Cosatu’s recent proposition to use civil servants pension funds to purchase a major stake in Eskom’s debt, could alleviate some of the pressures on the sovereign debt trajectory, and so SA’s credit ratings profile."
Above: Pound-to-Rand rate shown at 4-hour intervals alongside USD/ZAR rate (black line, left axis).
Thursday's SONA comes just weeks before the annual budget and the next credit rating decision from Moody's, both of which will be key to the trajectory of the Rand in the months ahead. South Africa needs to keep its last 'investment grade' rating if the government's bonds are to remain eligible prospects for some international fund managers and if the Rand is to avoid the capital outflows that might follow any Moody's downgrade to 'junk' in March.
Eskom's near-insolvent financial position and inability to keep the economy's ligths on mean the markets will be listening for details of any measures that could reduce the burden of the company on the public purse and reduce the economy's exposure to its often faulty supply of electricity. Investec says the government could potentially deliver on both those sores but has also warned there's a risk of disappointment that might ultimately undermine the Rand.
"Markets will also keenly watch for recently voiced ANC comments that the courts could be bypassed in the [expropriation-without-compensation] process, and deviation from the Presidents previous assurances," Bishop says. "Overall though, this year’s SONA is not expected to deviate significantly from previous years and could prove market neutral to negative, if none of the key issues for markets highlighted above are decisively addressed."
Above: Pound-to-Rand rate shown at daily intervals.
Thursday's SONA will either reveal signs of progress in the government's effort to structurally reform the economy and put the public finances on a more sustainable path or it won't, and in the process the outlook for the Rand in the weeks ahead will also be determined. Without any signs of progress, markets could begin to fear that February's annual budget statement will simply be rerun of the medium-term statement from October which stoked fears for the credit rating and a crushing sell-off in the Rand.
"USD/ZAR surpassed my, if not most, expectations, breaking 14.85 to open this morning firmly on the front foot, despite the US dollar index holding steady above 98.00," says Nema Ramkhelewan-Bhana, an economist at Rand Merchant Bank. "Local economic data is less than inspiring - production by South African manufacturers fell the most in five-and-a-half years in December. Yet, markets are more attuned to policy happenings."
The Rand has benefited in February from an easing of market fears over the impact that coronavirus will have on the global economy, which has dragged the USD/ZAR rate down from near multi-year highs at the end of January while pulling the Pound-to-Rand rate back from what was its highest level since the middle of 2018. However, with the the market focus now returning to domestic fundamentals the short-term trend in both exchange rates is all to play for.
Above: USD/ZAR rate shown at daily intervals.
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