Short the pound
By Peter Rosenstreich
UK Prime Minister Theresa May is heading back to Brussels for what we see as a way to collect air-miles. There is zero evidence that anything has changed on either side of Brexit: concessions from the EU are highly unlikely. As Brexit nears, UK manufacturers are stockpiling supplies and slowing production in expectations of cuts in orders. While politicians and investors seem oblivious to the risks of Brexit, main street is fully aware. We see rallies in GBP as opportunity to reload shorts.
Otherwise, markets are feeling sunny. US tariffs on Chinese imports are anticipated not to increase from 10% to 25% in March. The general risk-on environment in equities, commodities and currencies is driven by less-discouraging Chinese economic data and optimistic reports for this week’s round of US-China trade negotiations.
South African rand faces risk
By Vincent-Frédéric Mivelaz
The South African rand remains under heavy pressures, as investors are worried. Today’s budget announcement will be closely watched. Among the three major rating agencies, only Moody’s maintains the investment grade rating to government debt. Both S&P and Fitch downgraded to junk in 2018 due to political turmoil and poor mid-term budget report in 2017. Still, restructuring of the indebted energy department could help, if constructive solutions are put forward. General elections 8 May remain a big unknown. President Cyril Ramaphosa barely has had time to make his mark, and his support within the parliament and the African National Congress party remain thin.
According to the South African Reserve Bank (SARB), no interest rate cuts are likely. Following the first rate hike in more than two years of November 2018, SARB is not ready for further tightening. The economy is expected to have expanded less than 1% in 2018 (estimated at 0.70%) while annual inflation figures, given at 4% in January (prior: 4.30%) and lowest for 11 months, suggest a moderation due to weakening oil prices and a stronger rand. Risks of a sharp drop in private consumption and weakening economic sentiment are rising. We favour long USD/ZAR positions. Currently trading at 14.1020, USD/ZAR is heading along 14.1450 short-term.