Mornign Brief – Tuesday 21st

The Perfect Storm?

 

You would be forgiven for believing that the South African general election was the most significant threat to the Rand in the first half of this year. However, eschewed of blame as you might be, you’d still be wrong. In fact, the week ahead is considerably more risky. Tomorrow, the National Assembly will sit for the first time since South Africans headed to the polls two weeks ago.

 

 

At this event, the elected leader of the African National Congress, Cyril Ramaphosa will be inaugurated with the subsequent 48 hours likely to elucidate the leader’s cabinet appointments. So far investors have looked positively upon the outcome of this month’s elections, with the Rand outperforming the currencies of its emerging market peers. The relative appreciation in the Rand following the result has been thanks largely to an out-performance in the election versus the indicative polls that preceded it, creating the impression that the President will find it easier to implement the reforms that he has promised and regenerate an ailing, indebted economy.

 

 

However, the consolidation of this electoral result will determine the market’s impression of the election result and set the medium-long term path for the Rand. Clouds remain over many of the ANC’s senior members and the threat of their reappointment to government is undermining investor confidence in the economy, thereby devaluing its currency and debt. The most obvious way for the President to consolidate progress is to remove superfluous ministerial portfolios and streamline his cabinet. This would afford the opportunity to have a tighter and fresher governmental core to steer South Africa to stronger growth.

 

 

As if the cabinet appointments weren’t risky enough, the world will also see how the South African economy performed last month. The domestic inflation rate will be read tomorrow with the South African Reserve Bank deciding upon its target rate of interest on Thursday. Meanwhile, the trial of former president Jacob Zuma will continue throughout the week as yet another reminder of the corruption that has plagued South African politics. Serious political and economic risks therefore surround the Rand this week with conditions threatening to combine into the perfect storm.

 

 

The trade war and its ramifications upon global growth will undoubtedly weigh upon the wider basket of emerging market currencies. However, the relative performance of the Rand within this basket will undoubtedly be determined by the actions initiated this week.

 

 

In the United Kingdom today, Theresa May will outline exactly what the 4th leg of voting on her Brexit deal will entail. At the moment, the market, media and public alike are all wholly sceptical of her capacity to push the deal through the divided and frustrated parliament. However, with Sterling dragging its feet at two month lows, parliamentarians’ reactions today to the vote proposal will be important.

 

 

 

 

Discussion and Analysis by Charles Porter

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