Rand on a knife edge

The rand has been on a rollercoaster since the start of this year, and the new government’s discussions on who will form the new cabinet have seen the local currency balanced on a knife edge.

Prior to this year’s elections, the rand and local markets saw some hesitant gains but struggled to find direction as the outcome remained uncertain.

However, the ANC losing its majority and forming a government of national unity (GNU) with opposition parties saw South Africa’s rand and assets rally, as the markets saw this as a positive outcome.

“Positive local economic data played along, and global dynamics did not derail the optimism towards South Africa,” the Bureau for Economic Research chief economist Lisette IJssel de Schepper said.

On Thursday, 20 June 2024, this optimism saw the rand strengthen to below R18/USD for the first time since August 2023, stocks surged, and bond yields declined amid strong demand for local bonds. 

“Long may it last, but the keenly anticipated announcement of the cabinet will be pivotal in determining sentiment going forward, at least in the near term,” De Schepper said.

South Africans are waiting with bated breath to hear how the new GNU will compose its cabinet. The markets will favour a balanced cabinet with component ministerial appointments.

“On the flip side, any signs of public dissent within the GNU will be unsettling,” De Schepper warned.

Despite its traditional volatility, the rand has made strides that suggest that the political risk premium has subsided.

On Monday, 24 June 2024, RMB economists explained that a strengthening dollar implied that the rand should now recouple with global developments instead of being affected by local political uncertainty.

In other words, the value of the rand will now depend more on what is happening with the US dollar, 

The rand rebounded above the R18.00/USD handle amid this renewed dollar strength. 

TreasuryONE currency strategist Andre Cilliers said the dollar was boosted by stronger manufacturing and services PMI data on Friday, 21 June. 

He said the rand was also slightly weakened by the lack of news on the makeup of the new cabinet. 

“The President was expected to make an announcement on 23 June, but negotiations between the various parties are still ongoing,” he said. 

“We have expected some consolidation in the rand at current levels given the recent strong run, which saw the rand outperform all other currencies.”

However, on Tuesday, 25 June, the rand experienced its most significant drop in nearly a month, falling as much as 1.5% to trade at R18.24/USD. 

This drop followed investor anticipation regarding President Cyril Ramaphosa’s announcement of a new cabinet formed through a coalition with opposition parties. 

“Despite the initial fall, the rand has retained its position as the world’s best-performing major currency in June, gaining over 3% this month,” Cilliers said. 

“The market is closely watching for cabinet appointments that could potentially spur demand for South African assets.”

The RMB economists said that, with no giving guidance on a definitive date for the expected announcement of the new cabinet, “we expect rand volatility to remain elevated”.

This view is shared by Standard Bank’s head of foreign exchange trading, Warrick Butler, who told Bloomberg that the rand started off on the back foot this week thanks to some nervousness around the Cabinet announcement.

“As with any uncertainty within points of influence, the market doesn’t take it well, and so the rand has started off on the back foot,” he said.

“We have yet to see strong demand for South African assets from the offshore real money community, and I expect this will change if we get some decent news regarding the cabinet. So, I will continue to fade any weakness.”