The rally in the rand following the US Federal Reserve’s decision to hike rates last week has continued, as investors remain upbeat about South Africa – though some are still very cautious.
On Monday the rand was trading at R12.68 to the US dollar, a stronger position than the R12.72 high it reached on Friday (17 March) after the US Federal Reserve took a decision to hike rates softening the dollar and pushing investors into other markets.
The current levels mark the strongest position of the rand in 20 months, with the currency last hitting those levels in August 2015, subsequently getting battered by a brutal global economy and poor governance locally.
According to analysis done by Bloomberg, sentiment around the rand and its performance over the past 12 months has improved significantly, out-performing over 30 markets.
Meanwhile, risk measures in South Africa – from volatility to credit-default swap prices – are falling, Bloomberg said, and analyst forecasts are at their least bearish (ie most positive) in 18 months.
“The median forecast of analysts in a Bloomberg survey predicts the rand at R13.70 per dollar by the end of the second quarter. While that may seem bearish, the forecast has dropped from R15.83 a year ago. The last time analysts saw the rand below 14 per dollar was in October 2015,” Bloomberg said.
The group pointed out that rand volatility was also at a 15-month low, the risk around a possible credit rating cut is getting lower, and that bond inflows are on an upswing as investors regain their appetite for the South African market.
However it’s not all positive: while investors are hoping for the best, they’re still preparing for the worst, with options to sell the rand versus options to buy climbing by a percentage point – meaning there is an increase in investors hedging against the rand.
This sentiment is not without reason, as some analysts have pointed out that the market is painting an overly positive narrative around South Africa with little data to back it up.
According to research analysts at Nomura, South Africa’s ‘positive story’ in the markets is all wrong, and does not take into account the incredibly volatile political situation – where the economy hangs under an axe of a couple of ill-placed moves by president Jacob Zuma – and the country has shown little in the way of growth, and bringing down unemployment.
Nomura holds a more bearish view of South Africa, expecting the rand to start weakening again as the year progresses, and the country’s politics plays out.