Correction in the EUR/USD is likely
A midterm-spread in US-Bunds and US-Europe yields suggests a correction in EUR/USD is likely. This, after the minutes of the last European Central Bank monetary policy meeting triggered an extension of EUR/USD rally to current 1.22 highs. They suggest that the ECB plans to address quantitative easing earlier than was expected. March is too early for the ECB to remove QE bias, as recent inflation data has been subdued. But heading into Italian elections on 4 March, the ECB must keep a reign on interest rates. This also suggests that ECB President Mario Draghi will sanitize any hawkish tone, even if Europe’s growth and inflation are above the ECB’s own forecast.
In Italy, deep austerity has created a solid populist base likely to make itself known in March. Still, the measures have failed to lower debt to GDP (now over 130%, 2nd highest in Europe) or generate strong economic growth. A hawkish ECB could trigger hikes in Italian rates, worsening current economic difficulties.
China booms ahead
We remain optimistic on China, with an above-consensus GDP forecast. This is based on global economics and China’s ability to harvest demand. Domestically, China is unbalanced but on a global basis it is diversified (its New Silk Road strategy is on mark). Moreover, in 2018, trade matters more than local consumption. On one hand, strong growth will help support weaker property prices that peaked in 2016, but should trigger action by policy makers to accelerate deleveraging and lower fiscal spending. Lower capital outflows and renewed positive investor confidence has lowered CNY deprecation risks.
South Africa on a marketing campaign
Following President Zumas’ reelection in 2014, his recent rejection by the ruling party African National Congress (ANC) and his 783 related charges upheld by the South African Supreme Court of Appeal, investors have become optimistic, thus reinforcing the South African Rand (ZAR) and equity market since the beginning of 2018 (USD/ZAR: -2.95%; EUR/ZAR: -0.25%; FTSE/JSE 40: +3.11%, MSCI South Africa: +1.98%). Initiated by its new party leader Cyril Ramaphosa who’s confirming his willingness to wipe out corruption matter within the country, the ANC has initiated talks to replace Zuma before the end of his mandate, formally ending in 2019. Rumors even arising mention that the resignation could occur as early as within two to four weeks according to local analysts.
The World Economic Forum (WEF) is therefore a great opportunity to show investors how attractive South Africa remains and to regain investor confidence. South Africa has proven strong economic achievements since the beginning of the year: December 2017 Business Confidence surged by 96.4, November Retail Sales of 8.20% (consensus at 3.10%) and inflation is contained at 4.6% (way below the 13.6% hike in 2008). For these reasons we maintain our stance that South Africa is on its way to further economic growth for the 2018 outlook. This week we will be looking at December 2018 Consumer Price Index (January 24th 2018) and December 2018 Trade Balance (January 31st 2018).
