ZAR Fell Amid Rising Political Uncertainty, USD Consolidates

News and Events:

ZAR slides as political uncertainty rises

The South African rand was one of the few currencies that did not make the most of the broad USD sell-off. Since Monday, USD/ZAR surged 4.3% and hit the 13.00 threshold for the first time since March 15th amid rising political uncertainty. On Monday, Finance Minister Pravin Gordhan was recalled by President Zuma from an investor roadshow to face a court showdown today. Rumours are now circulating that President Jacob Zuma will soon request Minister Gordhan to step down. Finding a potential successor will be a tall order and the uncertainty has caused investors to pull back from sovereign bonds sending 10-year yields up 47bps to 8.80%.

However, the market is used to sudden spikes in volatility caused by Zuma’s government; therefore we expect that pressure should soon return to normal levels as investors resume their hunt for yields. USD/ZAR should quickly return towards the 12.50 level in the short-term.

Stick with core driver over short term Trump hype

Our core drive for macro asset pricing for the last five years has been that global central banks accommodating policy will support risk taking. Brexit, Trump, terrorism for all their thunder can move investors off cheap capital. If the prospect of breaking up the world’s largest economic union in 2 days (UK triggering Article 50) elicit panic stampede of risk aversion why would prospect of US political grid lock? We cautioned investors from getting stuck on transitional headlines and nonstructural forced pullback (risk valuations are high) as opportunity to reposition long. Asia stock indices reversed the US decline indicating that traders have already shifted from the Trump story. Additional weakness in US yields curve has help support risk taking (US 10 year stabilized at 2.37%). USD has been weaker against most EM currencies especially RUB and MXN, as Chicago Fed President Evans provided a dovish tone (not surprising). He indicated that failure of the repeal Obamacare bill increased uncertainty and should naturally lower prospects of a Fed hike. This new cycle highlights risk of chasing volatility verse sticking to the core driver. On the docket today two know hawks in Kaplan and George will keep the hopes of a June hike alive. We remain bullish on risk despite evidence of overstretch USD selling viewing the opportunity to harvest carry as a rationale to participate in higher yielders (limited macro risk). The lone exception would be our short trade EURCHF which is expected to grind lower, placing the SNB in a very difficult situation.

Mexico regains some strength despite Trump

Markets are pricing in further difficulties for Trump to deliver his program. The never-ending story of Trump’s wall for the Mexican border is far from over, yet it seems very difficult to imagine how it will be financed, though we recall that his initial thoughts were that Mexico should pay for it themselves.

Economically, Mexico is closely scrutinising any and all developments from the Fed. This Thursday, Banxico will likely increase its overnight rate to 6.5% from 6.25%. The Mexican central bank has changed its meeting dates to closely follow FOMC meetings in order to make sure that Mexican monetary policy is not surprised by any Fed moves. One of Banxico’s main objectives is to keep a rate spread between itself and the US to avoid any capital outflow.

Currency-wise, the MXN, which has suffered from Trump’s election, has strengthened since mid-January. Other data, shows that Mexico has regained some colour in its cheeks, including trade deficit which narrowed in February from $736 million in January to $398 million and factory exports, which have also enjoyed a boost.

Furthermore, we firmly believe that Trump will face major challenges in attempting to rewrite the NAFTA (North American free-trade agreement), which has tied Canada, the US and Mexico for more than two decades. For this reason, we believe that there is further room for MXN and we target 16.00 before year-end.

Today’s Key Issues (time in GMT):

• Jan Industrial Orders MoM, exp -2,60%, last 2,80%, rev 3,00% EUR / 08:00
• Jan Industrial Orders NSA YoY, last -0,90% EUR / 08:00
• Jan Industrial Sales MoM, last 2,60%, rev 2,50% EUR / 08:00
• Jan Industrial Sales WDA YoY, last 9,40% EUR / 08:00
• mars.23 FIPE CPI – Weekly, exp 0,06%, last 0,02% BRL / 08:00
• 4Q Non-Farm Payrolls QoQ, last 1,00% ZAR / 09:30
• 4Q Non-Farm Payrolls YoY, last 0,90% ZAR / 09:30
• ECB’s Makuch Speaks in Bratislava EUR / 11:00
• Mar FGV Construction Costs MoM, exp 0,50%, last 0,53% BRL / 11:00
• Jan House Price Index YoY, last 12,22% TRY / 11:30
• Jan House Price Index MoM, last 0,81% TRY / 11:30
• ECB’s Benoit Coeure in Panel Discussion in Brussels EUR / 11:45
• Feb PPI Manufacturing MoM, last 0,28% BRL / 12:00
• Feb PPI Manufacturing YoY, last -0,03% BRL / 12:00
• Feb Advance Goods Trade Balance, exp -$66.4b, last -$69.2b, rev -$68.8b USD / 12:30
• Feb P Wholesale Inventories MoM, exp 0,20%, last -0,20% USD / 12:30
• Feb Retail Inventories MoM, last 0,80% USD / 12:30
• Jan S&P CoreLogic CS 20-City MoM SA, exp 0,70%, last 0,93% USD / 13:00
• Jan S&P CoreLogic CS 20-City YoY NSA, exp 5,60%, last 5,58% USD / 13:00
• Jan S&P CoreLogic CS 20-City NSA Index, last 192,61 USD / 13:00
• Jan S&P CoreLogic CS US HPI YoY NSA, last 5,85% USD / 13:00
• Jan S&P CoreLogic CS US HPI NSA Index, last 185,54 USD / 13:00
• Mar Conf. Board Consumer Confidence, exp 114, last 114,8 USD / 14:00
• Mar Conf. Board Present Situation, last 133,4 USD / 14:00
• Mar Conf. Board Expectations, last 102,4 USD / 14:00
• Mar Richmond Fed Manufact. Index, exp 15, last 17 USD / 14:00
• Bank of Canada Governor Stephen Poloz Speech in Oshawa CAD / 14:10
• Bank of Canada Governor Stephen Poloz Press Conference CAD / 15:10
• Bank of Italy Governor Visco Speaks at Book Presentation EUR / 15:30
• SNB’s Maechler Speaks in Geneva CHF / 16:30
• Fed’s George Speaks in Midwest City, OK USD / 16:45
• Fed Chair Janet Yellen Speaks USD / 16:50
• Fed’s Kaplan Speaks in Dallas USD / 17:00
• Fed Governor Jerome Powell Speaks USD / 20:30
• Apr Business Survey Manufacturing, last 81 KRW / 21:00
• Apr Business Survey Non-Manufacturing, last 77 KRW / 21:00

The Risk Today:

EUR/USD keeps on pushing higher towards key resistance given at 1.0874 (08/12/2017 high) has been broken. Strong support can be found at 1.0493 (22/02/2017 low). Expected to show continued increase. In the longer term, the death cross late October indicated a further bearish bias. The pair has broken key support given at 1.0458 (16/03/2015 low). Key resistance holds at 1.1714 (24/08/2015 high). Expected to head towards parity.

GBP/USD now lies in a short-term uptrend channel. There are rooms for further strength. Hourly resistance located at 1.2570 (24/02/2017 high) has been broken. Hourly support is given at 1.2324 (03/17/2017 low). Expected to show continued strength towards resistance at 1.2771 (05/10/2016 high). The long-term technical pattern is even more negative since the Brexit vote has paved the way for further decline. Long-term support given at 1.0520 (01/03/85) represents a decent target. Long-term resistance is given at 1.5018 (24/06/2015) and would indicate a long-term reversal in the negative trend. Yet, it is very unlikely at the moment.

USD/JPY continues its declined since the pair has failed to break key resistance given at 115.62 (19/01/2016 high). The pair is heading lower. Hourly resistance can be located at 113.57 (16/03/2017 high). We favor a long-term bearish bias. Support is now given at 96.57 (10/08/2013 low). A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems absolutely unlikely. Expected to decline further support at 93.79 (13/06/2013 low).

USD/CHF is declining. Hourly support is given at 0.9862 (31/01/2017 low) has been broken. Key resistance can be found at a distance at 1.0344 (15/12/2016 high). Expected to show continued weakness. In the long-term, the pair is still trading in range since 2011 despite some turmoil when the SNB unpegged the CHF. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours nonetheless a long term bullish bias since the unpeg in January 2015.