Rand retreats after surprising rally
The South African rand has started retreating again following a surprising rally on Wednesday (12 April), where it gained back almost a third of its losses since the axing of former finance minister Pravin Gordhan.
On Thursday, the currency was trading at R13.55 to the US dollar, losing some ground from a rally that saw it strengthen to R13.42 in trade on Wednesday.
Economists were left mostly puzzled by the rally, though accepted that it had a lot to do with the softening of the US dollar on the back of comments from US president Donald Trump.
Local events – such as the marches against president Jacob Zuma on his birthday – played a lesser role, they said.
Despite the rally, traders said that South Africa’s political tensions put a cap on any gains the currency could see, and that the risks in the country remained.
The current retreat is underpinned by these risks, as well as investors taking profits as a mood of risk aversion spread through global markets.
The rand’s reaction to recent events in South Africa has not been as shocking as some had predicted, with the rand ‘only’ losing around R1.50 to the dollar since president Jacob Zuma fired former finance minister Pravin Gordhan.
The currency was hit by two subsequent ratings downgrades to junk by S&P Global and Fitch, but has not yet breached the R14.00 level, despite coming close (R13.94) earlier in the week.
According to analysts, the reason for this is that the build up to Gordhan’s axing, as well as the junk status downgrades, have been priced into the market for some time. Even so, the rand is in a volatile position, and is expected to worsen as the effects of recent effects take hold.
Further pressure on the rand is expected when the third ratings firm, Moody’s delivers its report on the country, with many expecting another downgrade (though only by one notch, to one level above junk status), and a further downgrade by S&P on South Africa’s local currency debt, which is still currently sitting above junk status.
Analysts at Nomura anticipate the rand gradually weakening to around R15.50 by the end of 2017, as the country moves through its political calendar leading up to the ANC’s elective conference in December.
Read: Best-case vs worst-case scenario for South Africa under Zuma: analyst
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