ZAR set to be a big loser as the commodity Super Cycle winds down

Since my visit to South Africa in November last year, I have advocated a short ZAR versus the USD basically against anything. South Africa is a young nation making many mistakes - as one would expect anywhere. But increased tensions, its rich entitlement programme and "one-trick pony" economy that is dependent on the commodity Super Cycle has, like other emerging nations, seen it engage in the manipulation of its currency. Hence, the strong negative bias (read my macro report on South Africa from last November).

The issue has accelerated this month, with ZAR down more than 7 percent. The yield curve has also steepened, indicating that the market (foreign investors) has realised that the South African Reserve Bank will cut rates despite being at risk of violating its inflation mandate (2-30Y + 33 bps & at 300 bps).

This morning, we will get GDP for the first quarter. Despite government and consensus growth of 2.65 percent, this is seen at a meeker +1.6 percent because a serious slowdown as expected.

 

Expected data from Bloomberg consensus at 11.30 this morning:

The 10-year yield is up 50 bps this month, outperforming even the US:

We are, as said, long USDZAR, with the initial medium target being 9.83/9.84, then 10.50/60.

As the commodity Super Cycle winds down, South Africa has only one choice left: to accept medium-term higher inflation for a lower currency. However, a society that is far from a mandate for real change will ultimately go down the easy policy path of manipulating its currency. But the irony is that most listed companies in South Africa will benefit from a lower currency rate due to export earnings (outside South Africa) being more than 60 percent.

Safe travels,

Steen

 

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Economist

 

Saxo Bank A/S  |  Philip Heymans Allé 15  |  DK-2900 Hellerup
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