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

Read: ANC in the firing line as the rand tanks

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