Compare the beginning of 2019 with that of 2018 and you can’t help but experience déjà vu. In both instances the rand strengthened quite significantly in January. However, the causes of the run are markedly different.
In 2018, the wave of Ramaphoria flooded over South Africa, and local news dominated the direction of the rand. Then Ramaphoria waned with an emerging market (EM) crisis that shocked the rand and other EM's in the latter part of last year.
Could this year be the exact opposite? Judging by the news and data out in the market and the expectation for the rest of the year, that might well be the case.
We started the year with the rand on the back foot as the US-China trade dispute was sending EM's on a downward spiral.
However, a few things have happened in the last couple of weeks that have helped EM's. A combination of the US-China trade optimism and the dovish Federal Reserve (Fed) has caused investors to look elsewhere for yield and into the welcoming arms of EM's.
This sudden surge of optimism has helped the rand move back into the R13.60-levels, after starting the year off at R14.60.
The reality is that while last year’s move was based on a particular event in South Africa, the latest round of EM impetus is driven by a much larger beast – the market itself. But while sentiment is in favour of the EM's, a collective change in tone for EM’s could lead to a swift turnaround.
The other variable that was obvious last year when the rand started to retreat, was that the whole EM basket came under fire, which sent the currency dwindling. But in 2019 the EM basket is relatively strong.
The outlier is South Africa, with political risks abound in lieu of our general election in May. A lot of attention will be paid to how the run-up to the election plays out and what the hangover of the elections will be regarding rating downgrades and possible budget implications. This has flipped the switch on the drivers of the rand in 2018 versus 2019.
In the short-term we could see some EM strength with the trade situation and the dovish Fed. This will create a fresh opportunity to inject some volatility into the market at the Federal Open Market Committee (FOMC) meeting this week regarding its interest rate decision.
The expectation is that the FOMC will keep rates unchanged, but a lot of emphasis will be placed on the tone of the statement after the announcement, which is expected to be dovish. Any deviation from this tone could spark a flurry of volatility.
We end the week with the US non-farm payroll number, which could either enhance the Fed's stance or cause conflicting ideas.
Uncertainty in the US market could cause another slip in the US dollar and put the rand further on the front foot. We still have the International Monetary Fund (IMF) cloud hanging over the market after the IMF downgraded its global growth forecast for 2019.
This has probably applied a bit of a handbrake on EM currencies and could be one reason why the market is currently trading in tight ranges. We await market direction this week with the FOMC and non-farm payroll numbers.
To catch up on today’s market commentary, have a look at the TreasuryONE blog which is updated daily.