South Africa

Rand under pressure

South Africa’s currency has faced considerable pressure over the past few weeks – from poor economic growth to greylisting and load-shedding. This pressure has led to a weak rand with little sign of a turnaround anytime soon.

The rand had strengthened over the holiday period, reaching a low of R16.72 against the US dollar in January.

However, the currency has since weakened significantly and has traded above R18.00 to the US Dollar since mid-Feburary.

This weakening is a direct consequence of the South African government’s mismanagement of the economy, said Dave Gracey, head of forex trading at Investec.

Gracey told The Money Show with Bruce Whitfield that while the US dollar is generally used to measure a currency’s strength, South Africa could benefit from keeping an eye on the Mexican peso.

Although the two currencies are not a direct comparison, both are proxied for emerging market sentiment and have tracked in line with each other for years.

The two currencies usually trade at around 1.6 pesos to the rand.

However, the Mexican peso overtook the rand for the first time in 35 years and the price has continued to level over the past few weeks. 

This could be an indication of better management of the Mexican economy, but it is also a reflection of the mismanagement of the South African economy.

US market moves

RMB’s client strategist, John Cairns, told Business Day TV that another reason for the weakening rand is the recent strengthening of the dollar.

There has been significant market movement out of the United States following the release of US economic data.

Cairns said this data, which included a better-than-forecasted US payrolls report, “completely upended” the financial markets.

Following the release of these reports, the dollar strengthened significantly and has held relatively steady since.

One silver lining for the rand this past month was finance minister Enoch Godongwana’s 2023 budget speech.

Cairns said the market responded very well to the budget, which addressed all its prior concerns.

In particular, the market was hoping for clarity on Eskom and other state-owned enterprises’ bailouts.

He said the budget gave more and better details on these issues than expected.

The budget also showed constraints on government spending and showed a fiscus surplus, all of which the markets approved of.

Before the budget speech, the rand hit its lowest point since November, dropping to R18.38 against the greenback. 

However, after Godongwana announced that the state would be taking on more than half of Eskom’s debt, the rand strengthened to 18.17, about 0.42% stronger than its previous close. 

Cairns warned that while the budget looks good on paper, the success of the policies lies in implementation.

More good news for the rand came at the start of March when China’s manufacturing activity expanded at its fastest pace since April 2012.

As South Africa’s largest trading partner, it boded well for the rand which strengthened by about 1% on the news.

Going grey

Last week it was announced that the Financial Action Task Force placed South Africa on its greylist for failing to clean up dirty money flows in and out of the country.

Cairns said this announcement will likely not cause a stir, as it would already have been discounted by the markets.

It remains to be seen whether the US Dollar will maintain its high and if China’s growth will continue to strengthen the rand.

President Cyril Ramaphosa’s imminent cabinet reshuffle may also result in market movements.

At the time of writing, the rand is trading at 18.18 to the US dollar.

The USD/ZAR exchange rate year-to-date.


Top JSE indices