Track­ing the tur­moil

Zuma’s mid­night min­is­te­rial move has hit the cur­rency and govern­ment bond mar­kets

Financial Mail - Investors Monthly - - Analysis: Technical -

The rand has come un­der con­sid­er­able pres­sure and bond yields have spiked fol­low­ing re­cent po­lit­i­cal de­vel­op­ments in SA.

It be­gan with fi­nance min­is­ter Pravin Gord­han be­ing re­called from an in­vestor road show to the UK on March 27. That morn­ing the rand had hit its strong­est level in 20 months.

From then, things de­vel­oped quickly, with news head­lines flip­ping from one piece of bad news to the next.

A mid­night cab­i­net reshuf­fle by Pres­i­dent Ja­cob Zuma re­sulted in Gord­han and his deputy, Mce­bisi Jonas, be­ing re­placed by Malusi Gi­gaba and Sfiso Buthelezi. Nei­ther of them was wel­comed by the mar­kets.

That quickly led to ratings agen­cies S&P and Fitch down­grad­ing SA’s credit rat­ing to junk sta­tus. In less than two weeks, the rand lost about 13%, from its best level of R12.30 to­wards the end of March, to R14 in the first week of April.

From a tech­ni­cal per­spec­tive the turning point for the rand oc­curred at a sig­nif­i­cant level.

The long-term weekly chart of the rand/dol­lar ex­change that looks back to the be­gin­ning of the millennium shows that the rand blew out to R12.50/$ at the end of 2001 be­fore stag­ing a sig­nif­i­cant re­cov­ery in the years that fol­lowed. It would take an­other 14 years to re­visit the R12.50 level.

In 2015 the cur­rency weak­ened sharply through the R12.50 level, blow­ing out again at the end of 2015, when then fi­nance min­is­ter Nh­lanhla Nene was fired. Af­ter the reap­point­ment of Gord­han in late 2015 the rand strength­ened through 2016, with mar­kets com­forted by his fis­cal dis­ci­pline and steady hands.

All Gord­han’s hard work looks to have been un­done fol­low­ing Zuma’s lat­est reshuf­fle. The re­sponse has been most clearly felt in the cur­rency and govern­ment bond mar­kets.

The yield on the R209 govern­ment bond that ma­tures in 2036 spiked from close to 9% at its best level at the end of March to 9.7% two weeks later.

Bond prices fall when bond yields rise. Tech­ni­cally the break above 9.5% on the R209 yield is sig­nif­i­cant. It breaks the trend of fall­ing yields that was ev­i­dent through 2016 and into early 2017.

The cur­rency move­ment is in­ter­est­ing in that the rand turned weaker at its 2001 worst level — about R12.50.

A flag pat­tern formed through 2016. These are typ­i­cally con­tin­u­a­tion pat­terns in a trend and they usu­ally break out in the di­rec­tion of the pre­vail­ing trend. The move above R13.60/$ marks a break to the up­per end of that flag pat­tern and points to the po­ten­tial for fur­ther cur­rency weak­ness over the medium term.

With fur­ther down­grades likely and the SA econ­omy likely to slip into re­ces­sion in the year ahead, the cur­rency will face a lot of head­winds.

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