ZAR retains a soft tone following news South Africa's Finance Minister Gordhan is to be charged over corruption allegations.
Pound Sterling, the Euro and US Dollar retain strength against South Africa's Rand after well-regarded Finance Minister Pravin Gordhan was summoned to appear in court on fraud charges next month.
This is the latest development in the long-running saga between President Jacob Zuma and his Finance Minister that could result in South Africa’s credit rating to be downgraded to junk.
Head of the National Prosecuting Authority (NPA) Shaun Abrahams read a statement on the 'rogue unit' in which Gordhan was allegedly involved at the South African Revenue Service (Sars) on Tuesday morning.
He announced that Finance Minister Pravin Gordhan had been summoned to answer for his role while Commissioner at Sars.
Abrahams outlined in detail why the NPA considers the "clandestine and covert operations of the said unit" were unlawful.
The Pound is particularly prone to fits of weakness on interference with the finance ministry.
The news has afforded the under-fire Sterling the chance to stage a decent recovery and the Pound to Rand exchange rate is now quoted at 17.42.
However, losses are worse elsewhere whith USD/ZAR charging higher by 3% to 14.22 and EUR/ZAR hitting 15.75 after making a 2.5% advance.
Be aware that previous bouts of ZAR stress relating to Gordhan have been relatively short-lived, but Gordhan's trial is just under a month away - ample time for uncertainty to fester.
And currencies hate uncertainty more than anything.
Whether or not the latest twist in the Gordhan saga will have a lasting impact ultimately depends on how the move impacts SA's credit rating.
"From an economist’s perspective, this is bad news. Amid so many negative issues emanating from the country’s political and economic system at present, South Africans and foreign investors see Gordhan as a beacon of hope for managing the state’s finances," says Christie Viljoen, economist at KPMG.
"The timing is also terrible, being so close to the MTBPS (mini-budget) and visits from international rating agencies next month," says Viljoen.
Others are more sanguine on the outlook.
"The chance that the Minister and his co-accused are found guilty remains very low. The charges appear extremely flimsy and even the charge sheet was, reportedly, hastily and badly drawn up. His innocence, however, may take years to be proven," says John Cairns at RMB.
It is next to impossible for the court to throw out the case on 2 November and the actual real court hearings will only begin a year later at the very soonest.
"Whether Minister Gordhan remains in his position, therefore, is a political decision. The formal power to appoint and remove any Minister remains with the President but practically the decision will be decided by the power groupings within the ANC. The only thing then that has changed is that the summons has provided an excuse for action to be taken by the President if he so wishes," says Cairns.
At first glance, the Rand’s reaction to the news was actually quite constrained.
Considering that USD/ZAR spiked R1.60 immediately on Nenegate and eventually peaked around R2.60 higher.
"The more we consider the news, however, the more the market’s reaction seems justified. After all what has really changed from what we knew before?" asks Cairns
The largest losses being suffered by ZAR in mid-week trade are seen against Sterling.
The Pound is being subject to a squeeze as the a market remains aggressively positioned Sterling-short.
Fortunes for Sterling also changed for the better on reports that UK PM May will accept the UK parliament to vote on the Government Brexit plans. Markets might see this as easing the risks for a hard Brexit.
However, it is still early days to draw firm conclusions as to whether the currency has seen the worst come to pass.
US Dollar Advance Heaps Further Woe on Rand
However, it would be wrong to only blame the Gordhan development on ZAR's weakness.
The Rand, Australian and New Zealand Dollars are all examples of high-yielding currencies that are suffering in the heat of the US Dollar's latest advance.
The Dollar is moving higher thanks to improving treasury bond yields as the probability of a Fed hike by year-end hit a new four-month high of 64%-75%, depending on where you source your data.
The important point to note is that expectations are rising, and with it so is the Dollar.
With the prospect of higher borrowing costs in the US becoming all the more certain the flow of money out of the US into global assets is tipped to slow and even reverse.
Cheap Dollars have typically been a source of support to ZAR as South African bonds have tended to offer higher interest rates to yield-starved investors.
Now, the prospect of higher US interest rates are likely strangle that dynamic and even increase the risk of heightened repatriation flows which will undermine ZAR further.
The Fed has arguably been the single most important driver for the Rand over recent years apart from sporadic Zuma-inflicted wounds; and today's price action shows why.
Rand Losing Support of M&A Flows
pair could see downside this week as a result of a change in merger and acquisition flows linked to the AB InBev (ABI) / SABMiller deal.
The deal had previously been supportive of the rand due to ABI buying up $110bn in SAB shares, however, from Tuesday, October 11 those flows will stop.
What’s more, are likely to switch to being rand-negative.
“The SABMiller deal turns from being massively rand positive to mildly rand negative this week. Today is the last day for ABI to purchase the rand that it needs – i.e. the last day the deal is rand supportive,” said a note by Rand Merchant Bank’s John Cairns.
After ABI finish paying SAB shareholders this week, Cairns expects much of this money to be “switched back offshore” leading to mild rand weakness from increased selling.
Also seeing ZAR losing steam on M&A flows is J P Morgan’s Head of Research, Hans Redekker who has told clients recent Rand strength is “unsustainable” due to the temporary flow strength of the SABMiller acquisition.
From a broader risk-related scenario, RMB's Cairns sees Hillary Clinton’s widening lead over Donald Trump as soothing for global financial markets, positive for risk appetite and therefore for the rand.
GBP/ZAR Chart Suggests Relief for Sterling
From a technical perspective there are signs the downtrend may be tiring, but no reversal yet.
The hammer which formed on Friday, on GBP/ZAR, due to the sell-off caused by Brexit fears, is not as long, pronounced or extreme as on other pairs, however, it could still provide a punctuation mark for the downtrend.
In addition, the pair appears to have formed a complete Elliot Wave down from the May highs, with all five waves now complete:
This would indicate a fairly strong possibility of a reversal occurring, and a move above Friday’s highs at 17.5256 would confirm a move up to a target at 18.0000.
Alternatively, given the downtrend is still technically intact the pair could also break even lower, with a move below Friday’s lows at 16.7953, opening up further downside to the next target at 16.3000.
The Pound meanwhile is seen as vulnerable to further declines, despite signs from technical setups on GBP charts that it may be exhausted.
City Index’s market analyst, Kathleen Brooks is skeptical of the possibility of a rebound higher.
“We may not see a bounce in the pound for some time,” she says in her morning report on Monday.
“Those looking for a recovery in sterling must be hoping that the GBP-negative rhetoric from the Tory Party conference has peaked, and after the posturing from both sides, that the UK/EU Brexit negotiations will actually go rather well.
“Many people hope that this will be the case, I’m just not that confident about a positive outcome at this juncture,” she said in a recent note,” she concludes.
JP Morgan Bearish on ZAR
JP Morgan's Daniel P Hui has meanwhile told clients he is bearish on ZAR moving forward.
For the analyst political risks are likely to continue being a major source of volatility for the Rand as the Hawks (an internal police unit) have not closed their case on Finance Minister Gordhan.
“We expect factionalism and tension around SOEs (state-owned enterprises), the nuclear program and personnel to periodically reappear, particularly with the 2017 ANC elective conference in sight. Our economist forecasts S&P downgrades in South Africa by year-end, and Fitch is also likely to place South Africa on negative watch,” comments Hui.
Any kind of credit downgrade will hit the rand hard.
Further, Rand valuations are overstretched according to J P Morgan’s models of fair value.
In addition, there is a risk that economic momentum will slow in Q3 after it rose in Q2, with a -0.1% expected growth rate in Q3.
Data to Watch for the rand
The main event for the rand is Tuesday when AB InBev pay out 110bn in cash to SABMiller Shareholders, and this could be a volatile day for the rand, with the potential for upside.
On the same day we also get South African (SA) Manufacturing Production.
On Thursday there is SA Minning and Gold Production.
The week ends with the Madonsela report on State Capture, in which President Jacob Zuma will be questioned by the Public Protector Thuli Madonsela about whether allegations that the wealthy Gupta family influenced him over state appointments is true.
Events to Watch for the Pound
On Friday October 14, the BOE host an event which could impact on the outlook for monetary policy, and therefore the pound.
The “Future Forum” sees all the members of the MPC speak.
“The subject of the Forum is "How can the Bank service society and maintain stability in times of change?" which doesn't sound like a policy-heavy day, but with microphones in front of the Governors and no MPC meeting this month, there will be ample opportunity to provide views.