Rand deteriorates further and Trade Deficit builds up
The Winter comes to an end, but the string of bad news on South African’s economy unfortunately not.
Last week was a bad one for the South African Rand. Amid a sharp emerging market sell-off sparked by volatility in the Turkish Lira and the Argentinian Peso, the Rand came under pressure in its own right. Although one of the worst performers of the Emerging Market Currency Basket, the reasons were not idiosyncratic to South Africa but rather a function of a broader rotation away from emerging markets that needed to be hedged. South Africa’s status as a sophisticated hedge against emerging market currency volatility means that it might ultimately be vulnerable to such sentiment and that was very clearly reflected last week.
The emerging market basket of currencies will be in focus again this week as investors seek clues on whether latest week’s trend will continue or whether the signs at the start of this week will help ease the pressures on the Rand
Arguably amongst the most disappointing releases last week, was the trade balance.
South Africa’s trade account unexpectedly recorded a deficit of ZAR 4.7bn in July, which compares to the June surplus of ZAR 11.9bn and consensus expectations for a ZAR 5.8bn surplus. On a cumulative basis, the trade account has deteriorated to a deficit of ZAR 6.51bn for the January – July period compared with a ZAR 33.2bn surplus for the same period in 2017. Much of that was due to the outsized deficit seen in Jan 2017, which reversed the surplus of December, but even if that were to be adjusted for, at best the trade account would have been flat on a cumulative basis.
Also, of interest this week will be the latest GDP data. Although this data is very historic, a soft reading holds the potential to impact on sentiment. We remind investors however, that a soft GDP reading is not automatically bad news for the Rand if it comes accompanied to a softening in consumption and a demand for imports ;-)