Morning Brief – GBPZAR

GBPZAR

Remember that old teaching: you can achieve similar things by smacking something very hard with a small hammer or by tapping something softly with a sledgehammer? I must confess I’ve never found great use or utility in this phrase partially because of my underwhelming expertise in DIY and secondly, it totally ignores the universe where you hit something very hard with a sledgehammer, a pastime that seems infinitely more interesting to me! So let’s go one step closer to fulfilling the permutations of this phrase and examine a forceful FX sledgehammering! Disclaimer: the universe of tapping something softly with a small hammer shall remain as vacant as it deserves!

We’ve been told by Moody’s ratings that South African sovereign debt is not likely to be downgraded anytime soon. The reason being that the agency holds a neutral outlook on the asset and they almost never downgrade a classification without prior warning of its downside debt risk. (Why let the truth come in the way of a good story?!) This stance is partially justified in the spirit of smoothing wider market reactions to credit market developments, but you must admit it seems more like a case of god forbid someone think they got it wrong last time: If the hat doesn’t fit, change the shape of your head instead! Whatever the reason, South African bond markets and the Rand have been partially stabilised by a confidence that billions of US Dollars’ worth of debt, and therefore Rand, won’t coming flooding back into the market for an anticipated 12-18 months. Our sledgehammer is forming, now to add the weight.

Brexit is still on for 31st October. Speaker of the House John Bercow blocked the Commons from voting on Johnson’s Deal yesterday upon grounds of repetition and frustrating the House. But taking note of the Letwin Amendment that attracted a majority in Parliament on Saturday, the Government has introduced the Withdrawal Act Bill to provide the infrastructure the amendment demands to vote on the final deal. All that means the government has set itself a three-day timeframe to secure the necessary support and legislature to allow the United Kingdom to leave the European Union at 11pm next Thursday. The chances of Johnson pulling this off are non-negligible. The FT yesterday claimed that its own analysis showed the Conservative government securing a majority of 5 votes if the House was allowed to vote on the new deal once again. We will see if the vote passes as essentially the same deal (now twice debated with a consent mechanism and a border down the Irish Sea) that has been voted upon 5 times makes it through to law at 7pm London-time today. If it does, the UK will begin its transition period until end-2020 from 1st November.

Queue the swing of our now fully formed weapon: Moody’s will also release its updated rating on South African Debt on 1st November. If the neutral outlook is what has supported the Rand then a simple reversion to a negative outlook on the asset could spur a speculative sell-off and shorting of the nation’s currency and its debt. Whilst the index funds that hold the debt physically will not be required to dump Rand Debt, you can be sure that the speculative arm of the market will make it look almost as bad as if they had. So, GBPZAR will be the nail we’re attempting to affix to the wall and our Brexiting-Downgrading sledge hammer could make dust of the very wall we tack it too. The best way to target this event to get the most Rand out of your Sterling, or indeed any base currency, is through a targeted series of limit orders which, of course, we have available to our clients and would be happy to discuss. This sledge hammer could be capable of restoring Rand comfortably to the order of 20 to the Pound before the dust settles. 

Discussion and Analysis by Charles Porter

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