The Budget, the Ratings Agencies and the Rand

On the release of the 2018 budget, the rand found continued strength against developed market and emerging market currency peers.

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The 2018 Budget Speech by Finance Minister, Malusi Gigaba has been been better received by the public than the mid-term budget was, with the suggestion that (in accompaniment with recent political events)  it may just be enough to appease ratings agencies in the near term and survive the upcoming review by Moody’s Investor Relations.

 The budget plan suggests an R85bn cut in expenditure over the next three years, while key proposals for increased collections are; a move from 14% in Value Added Tax  (VAT) to 15% and below inflation increases in personal income tax remittance.

The fiscal discipline in containing (reducing) expenditure over the next few years combines with recent moves by President Cyril Ramaphosa to address ailing State Owned Enterprise (SOE), Eskom. These have been highlighted concerns by ratings agencies and government is now showing real intent in addressing these issues.

Moody’s, the last of the three major ratings agencies to hold an investment grade rating on South Africa’s local currency debt is expected to conclude its review between now and the 23rd of March 2018. Broad expectations are that South Africa may have just done enough to buy another 6 months grace from the ratings agency, although it appears unlikely to shrug off the negative outlook.

Technical View

On the release of the 2018 budget, the rand found continued strength against developed market and emerging market currency peers, evidencing the domestic catalyst for strength.

From a charting perspective, the long term trend for the USD/ZAR currency pair is down (Dollar weakness / Rand strength). The USD/ZAR pair currently trades in a near term range between levels R11.55/$ and R11.80/$. The pair is looking as if it is reversing off the resistance level of this range (R11.80/$). With this in mind we favour a move back to R11.55/$, while a close below this level suggests the continuation of the longer term downtrend with the next support target considered at R11.30/$. A close above the black trend line on the chart above (currently R11.90/$), would consider the failure of the bearish near term assumptions.

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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.