The South African rand recovered some of the losses made on Thursday – off the back of a weaker dollar – but is still trading near 2-week lows, with a potential move beyond R12 to the dollar still a possibility.
Following a third session of weakening on Thursday, the rand recovered slightly in morning as US president Donal Trump announced his intent to impose tariffs on steel and aluminium imports in the States.
The announcement provoked fears of a possible trade war and reversed the dollar’s strong recovery, ultimately pushing the rand into more positive territory. By 10h45 on Friday, the rand was trading slightly stronger at R11.85, up from the 2-week worst of R11.94 hit late on Thursday.
- Dollar/Rand: R11.87 (+0.25%)
- Pound/Rand: R16.32 (+0.30%)
- Euro/Rand: R14.55 (+0.23%)
However, the dollar’s set-back was not enough to reverse the rand’s overall losing streak in the past week, where the markets took a hit from uncertainty around South Africa’s land reform policy, while also moving on from SA president Cyril Ramaphosa’s cabinet reshuffle.
According to Bianca Botes, Corporate Treasury Management at Peregrine Treasury Solutions, South Africa is seeing an element of fear in the markets as investors position themselves for a risk-off environment by moving out of riskier emerging market assets.
“Further exacerbating the effects of this risk-off environment, Tuesday’s motion on land redistribution without compensation can also be seen playing a role in the speed of the rand’s correction,” she said.
“By proposing changes to section 25 of the Constitution, government is inadvertently bringing all rights to property ownership into dispute, including bonds, assets and intellectual property.
“Consequently deeming the country a riskier investment domicile, this uncertainty will to some extent discourage foreign investors from investing in any South African property or assets, leading them to rather search for safer yields elsewhere,” Botes said.
Because of this uncertainty, Botes said the rand had broken through the R11.80/$ level “with some ease”, and warned that it would next target R11.90/$, with a potential move above R12.00/$.
According to Reuters analysts, with no local data releases schedules – and mid-tier data releases offshore – traders are set to eye the R11.90/$ technical resistance level as an indicator of momentum for the rand from here out.
The rand has been on a rally since the election of Cyril Ramaphosa to the head of the ANC and then as president of the country.
However, some analysts have argued that the positive sentiment around Ramaphosa has overshadowed the troubled economic data out of South Africa, and has led to the rand being overvalued in the market.
This week, the so-called ‘Ramaphosa rally’ has given way to global headwinds.
Despite this, over the longer term many still see the rand strengthening further, particularly if the necessary policy shifts take place, and the country can avoid a credit downgrade. BMI Research targets a ZAR/USD price of R10.90 by the end of the year.