Morning Brief – Wednesday 24th

Auspicious Start…

The Rand has lost close to 1% on a trade weighted basis today alone. The depreciation of the South African currency has occurred despite the intraday appreciation of the broader basket of emerging market currencies. Presenting the mid-term budget statement, South Africa’s new Finance Minister, Tito Mboweni, announced that South Africa’s fiscal deficit has not yet peaked. Instead, borrowing to finance the deficit within Africa’s largest economy will continue to grow for at least two years before the deficit begins to fall. The major depreciation of the Rand only a few weeks ago, spurred by Turkey’s domestic currency crisis, was caused by the overwhelming size of its twin deficit (the dual occurrence of current account and fiscal deficits). In reaction to the news of sustained fiscal irresponsibility, bond yields rose whilst the currency fell, as traders scrambled to price in the increased risk within the Rand. Moody’s is at present the only ratings agency to hold South African debt denominated in Rand within the ‘investment’ grade. Should the asset fall from the classification and drift into junk it will prompt the liquidation of many holdings largely held abroad, beginning a considerable sell off in the Rand. Limited progress on Brexit and shaky grounding for Theresa May continues to hinder the Pound. Sterling has failed to catch a bid amidst reports of a frosty cabinet meeting yesterday. Chancellor Hammond will deliver his budget speech next week with investors keeping a wary eye on whether he will be able to honour May’s claim at the Conservative Party conference that austerity is over. With the Commission rejecting Italy’s budget, Guiseppe Conte’s coalition government has only three weeks to return with a plan B which, at present, supposedly doesn’t exist. With the Euro dropping off considerably today and falling into the 1.13s for the second time this year, the Euro trades at a considerable discount to other major currencies. The Dollar continues to hold on to its elevated value amidst the Euro and Pound’s turmoil despite Trump’s continued attack on the Fed and its Governor Jay Powell. With mid-term US elections around the corner, promises of fiscal stimulus have underpinned the greenback.

• GBP: Domestic political uncertainty and a lack of confidence in Theresa May weighs on the Pound. GBPUSD drops below 1.29 as May’s position is challenged for at least the third time.

• EUR: Italy’s proposed budget is rejected by the Commission with BTP spreads hitting a 5-year high.

• ZAR: South Africa’s new Finance Minister has a shaky start, tanking the domestic currency by near-on 1%.  

Discussion and Analysis by Charles Porter

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