The rand has been buoyed by a number of global factors as the past two weeks have seen markets turn from skittish and risk-averse to an emerging market dream, says Bianca Botes, treasury partner at Peregrine Treasury Solutions.
“It is clear that the rally in the rand is in no way a result of local elements,” she said.
“Rather, the improvement witnessed in the local unit over the past two weeks can be attributed to two key global factors that are driving risk appetite.”
Botes said that these factors include:
- Continuous monetary easing by central banks including the Chinese Central Bank, European Central Bank and the Federal Reserve;
- A possible easing in trade tension between the US and China.
“On Thursday we saw a massive retracement in the rand, gaining as much as 1.5% against major currencies on the back of the ECB rate cut and quantitative easing decision,” Botes said.
Andre Botha, senior currency dealer at TreasuryONE, agreed that the world suddenly seems like a lot better place than it did in August when ‘risk-off’ was the buzzword.
He also attributes the local currency’s strengthening to the ECB rate cut and the possibility of an interim trade deal between the US and China.
“The rand and other EM’s firmed on the two big events yesterday and the rand looks very comfortable around the R14.60 level,” he said.
Despite the fact that the currency has strengthened to its best level in more than a month, Botes warned that the positivity around the local currency should be tempered somewhat.
“The rally in the rand, although it can be expected to extend even to around the R14.20/dollar mark should the favourable environment persist, would not be sustainable in the longer term,” she said.
“We urge those purchasers looking to acquire foreign currency not to become too greedy, as the rally will eventually run out of steam, and they might end up missing a fantastic opportunity.”
The rand’s strengthening is also in line with historical data, according to Bloomberg’s analysts.
The currency slumped about 6% against the dollar in August – the most in a year – as the escalating US-China trade war weighed on emerging-market assets, while Eskom’s troubles made investors wary about South Africa’s fiscal outlook.
An August slump is not unusual for the rand. It has declined against the dollar in eight out of the past 10 years, according to data compiled by Bloomberg.
But in six of those eight years, the currency rebounded in September – including last year, when it posted a 3.7% gain.
The rand was trading at the following levels against the major currencies at 11:40 on Friday (13 September):
- R14.56/dollar (0.40%)
- R18.16/pound (-0.60%)
- R16.17/euro (0.04%)
Despite the positivity surrounding the local currency, South Africa’s economic growth is unlikely to reach the treasury’s target of 1.5% in 2019 because conditions have changed and the country is facing increasing headwinds.
This is according to finance minister Tito Mboweni who was presenting at a banking conference in Johannesburg on Friday, Reuters reports.
“The assumptions underlying the forecasts have clearly changed, the actual deficit now is probably much higher,” he said.
He added that increasing calls for the treasury to bail out state firms, most recently power utility Eskom as well as state air carriers, was putting pressure on growth and spending.