Rand under threat

While the rand has experienced a strong rally over recent months, unpredictable global factors loom large over the currency, and there are real risks of a sudden devaluation.

This is according to Citadel Global director and currency expert Bianca Botes, who explained that the rand strengthened by 7.9% over the past year. 

This strength was due to South Africa’s peaceful election transition, interest rate cuts, favourable trade dynamics, and suspended load-shedding.

However, she said the currency could still be negatively impacted before the end of the year by factors like the US elections, US monetary policy changes, a weakening Chinese economy, and escalating regional conflict in the Middle East, which could also affect oil prices.

“We are keeping a close eye on the conflict in the Middle East and its potential escalation. An escalation in the conflict will cause a global flight to ‘safe-haven’ assets but also increase oil prices,” Botes said. 

“While the conflict is largely priced in, one needs to remain wary of a situation where other countries become involved, and the conflict spreads to a wider part of the region.”

Furthermore, the US election result could also be a defining moment for the market over the next four years. 

“If Donald Trump wins, we could see increased tariffs on exports to the US with a key focus on China, as well as governmental unpredictability and an increase in geopolitical tension and fragmentation,” she warned. 

“This scenario will again support a case for investors shifting towards safe-haven developed market assets.”

China is also an important market to watch when assessing the potential impact on the rand’s value.

“China is the biggest consumer of commodities and the world’s second-largest economy. South Africa is a major exporter of commodities to China, so a strong Chinese economy bodes well for the rand,” she explained. 

Recently, South Africa received some good news when China unleashed a much-anticipated stimulus package to the tune of $142 billion as part of its commitment to reach its 5% growth target. 

Botes said the stimulus package came as a welcome boost for sentiment and commodity prices, which in turn boosted the rand.

However, she warned that the optimism over this boost quickly ran out of steam as investors started looking towards structural and policy reforms that would ensure sustained foreign investment and confidence in the Chinese economy. 

“Continuous weak growth from China, weighing on commodity prices, therefore, remains a major risk factor for the rand,” she said.

Another factor that could impact the strong rand is the stability of South Africa’s new Government of National Unity (GNU). 

“We are seeing improved sentiment towards South Africa – and this will persist if we see some tangible policy reform, bearing in mind policy has a lagging effect, so we will only bear the economic fruits months down the line,” she said.

Regardless, she added that the GNU remains a positive development for South Africa, even if growth does not trend upwards immediately. 

However, she warned that things could go south if there is a breakdown of cooperation within the GNU. 

She said it will be important to monitor the upcoming Medium Term Budget Policy Statement (MTBPS) towards the end of the month.

“While we are relatively optimistic about the rand, a word of caution is prudent,” she said.

For one, the market is still betting on larger rate cuts than what the US Federal Reserve guidance indicates, and disappointment from the Fed can cause a reversal in rand strength.

This could be seen over the past week when the rand weakened from R17.02 to the US dollar on Monday, 30 September, to R17.49/USD on Monday, 7 October, as data from the US supported a more hawkish approach by the Fed.

The past two years saw a persistently strong US dollar. “As a result, we have seen the rand and its peers come under pressure against the greenback,” Botes said. 

“We have also seen emerging market currencies as a whole trade in a bear market for about a decade now.”  

“These two points are important when we look at the local currency, as when compared to its peers, it is not an exception to the norm.” 

“That, however, changed over the past few weeks, as we saw the rand continuously outperform most of the other emerging market currencies.

Botes explained that the rand remains one of only five emerging market (EM) currencies out of a total of 23 that has been trading stronger against the dollar year to date.

Improved terms of trade, peaceful elections, and the easing of monetary policy were factors that contributed to the rand’s strengthening against its peers and the USD. 

“With gold, which is our biggest export, and oil, which is our biggest import, we were seeing a big divergence in price action, and the terms of trade have significantly improved for South Africa, with a 43% gain for gold over the past year versus a 17% decline in oil,” she said.

Botes added that Citadel believes the fair value of the rand is closer to the R17.50/R17.80 range and anticipates more volatility in the rand.

However, the company’s overall view is that emerging market assets remain well-positioned for a strong rally as the USD weakens on the back of looser monetary policy. 

“For the time being, the rand is considered overbought closer to R17.00 and profit-taking and technical corrections are expected at this level,” Botes said.