Rand goes from hero to zero – to hero again
The South African rand has been on a rollercoaster ride, surging in value to under R18/$ and then weakening to over R18.50/$ in three days. It is now strengthening again.
While many have put this down to uncertainty surrounding South Africa’s new cabinet, some economists have noted that far larger forces are at play in the global economy that are influencing the rand’s value.
The rand has experienced significant swings in value in the past few weeks following South Africa’s landmark election, in which the ANC lost its majority for the first time since 1994.
Its value soared on the back of hints that a market-friendly coalition would govern South Africa, with the ANC and DA joining forces to form the basis of a Government of National Unity (GNU).
When Cyril Ramaphosa was sworn in for his second term as president, the currency briefly dipped below R18/$ for the first time in over ten months.
This also led to the benchmark JSE All Share Index jumping to an all-time record high and government bond yields declining to their lowest level in 14 months.
While the rand retreated slightly as investors waited for Ramaphosa to announce his cabinet, it hovered close to the R18/$ level.
Uncertainty gripped markets as the cabinet announcement was repeatedly delayed, with the DA even threatening to walk away from negotiations. This saw the currency’s value plunge towards R19/$.
Once the cabinet was announced, the rand rallied again to below the R18 level. Investors and commentators thought this would start a longer-term rally for the currency, pushing it down towards and even below R17/$.
“USD/ZAR remains heavy given the markets’ most favourable outcome came true,” said Robert Hoodless, co-head of forex and macro analysis at InTouch Capital.
“A possible break below R18 is encouraging some to look toward R17.50 as a wave of optimism about better governance in South Africa continues,” Hoodless said.
However, this was not the case as the currency soon took another dive in value, blowing out to over R18.50/$ on the same day South Africa’s new cabinet was sworn into office.
The rand has lately strengthened slightly to around R18.20 as of 08:00 on 5 July.
Why the rand went from hero to zero
The rand’s drop to R18.50/$ was more about dollar strength than about rand weakness. The greenback was boosted by the possibility of US interest rates staying higher for longer.
Investec chief economist Annabel Bishop said the comments made by the Federal Open Market Committee (FOMC) members, the body that determined the US interest rates, indicated that rates will remain elevated.
The FOMC noted that progress in reducing inflation had been slower this year than they had expected last December.
Consequently, the market view remained the same, with the first interest rate cut of 25 basis points in the US only expected with 100% certainty in November.
Bishop said members of the FOMC do not expect it to be appropriate to lower the target range for the federal funds rate until it is clear that inflation has been tamed.
Higher US rates for longer are likely to bolster investor demand for dollar-based assets, increasing demand for the greenback and thus strengthening its value.
With South Africa’s inflation picture much clearer and trending downwards, the Reserve Bank will likely cut rates in September, with an outside chance of a cut in July.
If the Reserve Bank cuts rates before the US Federal Reserve, the relative attractiveness of fixed-interest South African assets will decline, weakening the rand.
Politics still a major factor
While global factors are at play, local politics will still influence the value of the rand.
Efficient Group chief economist Dawie Roodt told Daily Investor that political developments in South Africa may outweigh the impact of global economic forces.
Roodt said two possible scenarios exist for the rand’s performance following the new government’s election.
“The first is a very good scenario. And that is where they do all the right things,” he said.
If the GNU can perform and show true reform of the country, the rand can easily appreciate and return to R17/USD in the short term.
In the medium to long term, Roodt expects the currency to gradually depreciate, at roughly 2% to 3% annually against the US dollar.
In the longer term, assuming the GNU “does all the right things,” South Africans could expect the rand to continue gradually depreciating against the US dollar at around 3%.
Roodt’s second outcome is a bad scenario in which the GNU succumbs to political hurdles and collapses, and another political formation takes over in South Africa.
This would see the rand plummet, and the currency would very soon exceed R20/USD, even reaching R22/USD.
Roodt pegs the fair value of the currency at between R17/USD and R17.5/USD.
“And that is something I think can be achieved if all the right things are done,” he said. “Between these two scenarios, I’m quite optimistic. But I must also say that I will be surprised if this coalition really lasts for the full five years.”
USD/ZAR exchange rate
Below is a graph showing the swings in the value of the rand over the past six months, from the build-up to the election to the present day.
The chart below shows the value of the rand since the dawn of democracy in South Africa, illustrating its steady weakening versus the dollar.
Comments