The last three months of 2016 brought something for everybody, if not always exactly what they were hoping for. America’s Federal Reserve eventually delivered its second interest rate increase in ten years. The European Central Bank announced an extension to its asset purchase programme.
A French court found the managing director of the International Monetary Fund guilty of negligence. Downing Street stuck to its Delphic maxim that Brexit means Brexit despite being challenged in court over its right to exercise the Article 50 EU departure process without parliament’s approval. The safe-haven Japanese yen was trashed while the South African rand shared top position with the US dollar.
Britain’s pound came out of its Brexit shell to deliver a better quarterly result than most of its major currency peers. And, to cap it all, US voters elected a beauty pageant organiser and TV compère as the 45th president of the United States. Investors may not have liked some of the developments, but they certainly found them interesting.

United Kingdom – the pound fights back

In early October sterling had a scare when, out of the blue, it suffered a 2% “flash crash” markdown during the Far East session while London was sleeping. No fundamental reasons for the move were evident: a subsequent investigation suggested that it was caused by a US bank trader selling aggressively into an illiquid market.
Whatever the rights and wrongs of the affair, the downward spike marked a quarterly low for the pound against most currencies. It seemed to shock investors into a realisation that the developing prospect of Brexit was not sufficient to justify sterling’s total destruction and from its all-time low, the pound has strengthened across the board.
The UK ecostats helped it along, especially the upward revision to gross domestic product which showed the economy expanding by 0.6% in the third quarter. Whatever fears the actuality of Brexit might hold for the future, its approach still shows no sign of derailing economic activity.

South Africa – another win

It was more of the same for the rand in the last three months of 2016. It strengthened by 2% against the resurgent US dollar and by more than 7% against sterling, retaining its mantle as the top performer among the dozen most actively-traded currencies.

As before, investors satisfied their appetite for illiquid emerging market currencies by buying into the rand as a substitute. Although the prospect of an interest rate increase by the US Federal Reserve was a disincentive to that mood, the Bank of Japan continued to pump out ultra-cheap money, and the European Central Bank said it would developing prospect of extend its asset purchase programme beyond its scheduled end date in March.
Two other non-ecostat events also contributed to the rand’s success. The first was the news, at the beginning of November, that police investigators were dropping charges against finance minister Pravin Gordhan that related to his term as head of the country’s tax agency. The second came a month later when Standard & Poor’s confirmed South Africa’s “investment-grade” BBB-credit rating: there had been concerns about a possible downgrade.

Issues which could affect the South African economy

Credit rating

The reaffirmation by S&P of South Africa’s BBB- investment grade rating is not the end of the story. S&P left the country on “negative watch” and will reassess the situation in the middle of 2017. Without a more positive economic picture, there would again be the risk of a downgrade.

Growth

Weak mining and manufacturing production data for October point to a further slowdown of economic growth in the fourth quarter. Gross domestic product expanded by just 0.2% in Q3, itself a far from impressive achievement.

Interest rates

With the headline rate of inflation at 6.6%, there is little opportunity for the South African Reserve Bank to lower the 7% benchmark interest rate that has been in force since March 2016. There is therefore equally little chance that 10-year government bond yields are about to head lower from their current level close to 9%. The resulting real return of roughly 2.4% (9% yield minus 6.6% inflation) should continue to attract investors.

Budget gap

The International Monetary Fund estimates that government debt will peak at 54% of gross domestic product in 2018/19. However, without a revival of economic growth and sustained investor confidence the situation could deteriorate into what the IMF describes as “a vicious circle of falling growth and rising debt”.

 

by Jacques  de Villiers from FC Exchange

FC Exchange is defined by Value, Quality, Efficiency and Transparency.

Jacques de Villiers