Rand bounces back – but still on a knife edge

Following a rough start to the year, the rand has strengthened since mid-April as Eskom and Transnet have improved their performance, and the dollar buckled amid weak economic data.

However, the local currency will remain volatile as South Africa faces one of its most uncertain elections on 29 May.

This is feedback from TreasuryONE’s senior currency dealer, Andre Botha, who told Daily Investor that the rand has actually started to appreciate since mid-April.

He said this strength has been counterintuitive given that South Africa is heading for the most important elections in recent memory. 

He explained that a lot of this has to do with some of the rand’s risk premium being unwound due to some state-owned enterprise failures being corrected or at least alleviated with the private sector’s help. 

For example, a recent milestone has been 50 days without load-shedding in South Africa. This was achieved because Eskom’s performance has improved, demand has been lower, and renewables have become widespread.

Botha said it is important to remember that the rand has been undervalued for the better part of two years. Therefore, any good news about South Africa can be seen as a boon to the rand. 

However, he warned that this undervaluation still remains as not everything that has been priced in the rand will be fixed overnight. 

In addition, the realisation that the elections could avoid a hard swing towards the extremes of the political spectrum and that some of the risks priced into SA markets can now be unwound. 

The severe degree of rand undervaluation means the currency could still appreciate further and be undervalued, he explained.

In addition to rand strength, the US dollar has lost some of its shine after disappointing economic numbers in the last couple of weeks. 

The CPI and the retail sales numbers were the latest to show that the US economy is slowing down. 

We still have to see what the expectations are for the US Fed and whether they are expected to cut interest rates this year, as projections have continually been pushed back amidst the Fed’s hawkish tone.

“Any move in the US dollar invariably gets passed onto the rand, so the rand can be the benefactor of better-than-expected local news and a weaker US dollar,” Botha said.

“However, with the world economy on a knife edge, both sides of the argument are still valid.”

“This means that we can be in for greater volatility going into the election and especially after the election and market players are advised to not take risks over the election period as market moves can be swift.”