The positives and the negatives driving the rand right now
With the rand experiencing more downs than ups this week following president Jacob Zuma surviving a no-confidence vote, it is difficult to predict where the currency is headed to next.
Adrian Cloete, a portfolio manager at PSG Wealth, said that as the rand is a very liquid currency driven by many macro-economic factors, it can be a somewhat futile exercise to try to predict its short-term direction.
Every negative possibility has a counteracting positive possibility, proving just how difficult these types of predictions are, Cloete said.
The rand will need to overcome one final hurdle before the weekend – Moody’s review of the country’s debt.
The country’s sovereign debt was cut to sub-invesment by Fitch and S&P Global Ratings in April after president Zuma sacked Pravin Gordhan as finance minister. In June, Moody’s cut its rating to one notch above junk with a negative outlook, citing risks to growth and fiscal strength due to the political outlook.
The ratings firm is scheduled to release an updated review on Friday.
Cloete takes a view on the positive and negative factors driving the rand, below:
| # | Negative influence | Positive influence |
|---|---|---|
| 1 | If SA loses S&P and Moody’s remaining local currency investment grade sovereign credit, this could cause disinvestment by bond investors who can only hold investment grade bonds | If SA maintains its remaining local currency investment grade sovereign credit and the rating agencies change their negative outlook to neutral, this would likely lead to a stronger rand |
| 2 | If market participants start to anticipate monetary tightening by developed markets like USA and Europe, then they might become risk adverse and sell emerging market assets/currencies | If market participants anticipate a delay/postponement of monetary tightening by developed markets, they might be inclined to take on risk and buy emerging market assets/currencies |
| 3 | If commodity prices start weakening again and this affects our terms of trade negatively, this might also cause rand weakness | If commodity prices start increasing again and this affects our terms of trade positively, this might also cause the rand to strengthen |
| 4 | If investors perceive risks are increasing in South Africa as an investment destination, this might also cause rand weakness | If investors perceive risks are reducing in South Africa as an investment destination, this might also cause the rand to strengthen |
| 5 | As the rand is usually inversely correlated to the dollar, a weaker Euro would most likely cause the rand to also weaken relative to the dollar | Equally, a stronger Euro would most likely cause the rand to strengthen relative to the dollar |
| 6 | A strong dollar against other major and emerging market currencies would also likely cause a weaker rand | A weak dollar against other major and emerging market currencies would also likely cause a stronger rand |
| 7 | Any event that causes investors to fear a global downturn or threat to the global economy, or weaker commodity prices would likely lead to risk aversion and a weaker rand vs the dollar | Any event that causes investors to become optimistic about the global economy and higher commodity prices would likely lead to less risk aversion and a stronger rand vs weaker dollar |
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