Tracking the turmoil

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

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.