Rand report- Moody's to watch the mid-term budget speech

Moody’s is looking to the Finance Ministers Mid-Term Budget speech before releasing a full ratings review, the rand remains steady.

Moody’s Investor Relations has published a credit opinion report on South Africa, although will look to next week’s (24 October) Medium-Term Budget Speech (MTBS) before releasing its next ratings review on the country. The ratings agency is the last amongst its major ratings agency peers (Standards & Poor’s and Fitch’s) to still have South Africa’s local currency debt at investment grade (albeit only one notch above sub-investment grade or “junk”).

Some of the key points from Moody’s credit opinion report are as follows:

  • Economic growth for South Africa revised (lower) to 0.5% in 2018 and 1.3% in 2019
  • Government needs to stimulate growth through policy and investment
  • State Owned Enterprises need to be stabilized to reduce the “contingent liability” to a debt burdened government
  • Reforms which address SOE’s could be positive to ratings
  • Failure to address SOE debt and Government liabilities could be negative for ratings
  • Government could reduce the deficit from 4.3% of GDP to 3.5% of GDP by 2020/21
  • Debt should be maintained below 60% of GDP

The rand – Technical View

The rand 18102018

A daily chart of the USD/ZAR shows the currency pair to have moved towards the support target from our previous note (Finance Minister Tito Mboweni and the Budget Speech). The move lower now sees the USD/ZAR testing a confluence of both horizontal and trend line support, at around R14/$.

Currently we have a few technical indications to consider for the USD/ZAR

  1. The long term trend is up (dollar strength / rand weakening)
  2. The stochastic is in oversold territory
  3. A head and shoulders reversal pattern may be forming (not complete)

While the head and shoulders pattern (labelled L, H and R) warns of a possible price trend reversal from up to down, the pattern has yet to confirm with a close below key support at R14/$. In lieu of the upcoming MTBS and ratings review to follow, we feel that moving the breakout confirmation to a close below R13.85/$ may be more prudent. This would suggest a greater weight of conviction in the move down should it occur.

However, until such time as the reversal pattern provides a confirmation signal (with a downside breakout), we continue to favour a move higher for the USD/ZAR currency pair (dollar strength /rand weakness). The long term trend remains up and the short term move lower may already be over extended as the oversold signal is starting to suggest. Our current stand point is that a move to R15/$ is favoured, while a close below R13.85/$ might be used by traders as a failure/stop loss level.

The failure of the bullish move would also act as a confirmation for the bearish move, in which situation we will update the guidance.

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This information has been prepared by IG, a trading name of IG Markets Limited and IG Markets South Africa Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. International accounts are offered by IG Markets Limited in the UK (FCA Number 195355), a juristic representative of IG Markets South Africa Limited (FSP No 41393). South African residents are required to obtain the necessary tax clearance certificates in line with their foreign investment allowance and may not use credit or debit cards to fund their international account.

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