The rand has continued to appreciate since the start of the year, boosted by upbeat investor sentiment, say Nedbank economists.
In a research note on Thursday (15 April), the bank said that the local currency has particularly benefitted from the approval of the additional fiscal stimulus in the US and confirmation of the US Federal Reserve’s dovish stance on inflation which implies that interest rates will remain low for a prolonged period.
“These developments fed risk appetites, encouraging the search for higher yields,” it said. “Apart from China, the rand was one of the few beneficiaries. Since the start of the year, the rand gained 2.3% on a trade-weighted basis and 1.3% against a stronger US dollar.”
Nedbank said that the rand is now close to fair value based on its estimates of purchasing power parity. It added that the future trajectory will therefore be harder than usual to predict.
“We forecast the rand to hold value in 2021, buoyed by strong global risk appetites, South Africa’s relatively high yields and supportive underlying trade flows. However, the currency will be more volatile, with significant downside risks.”
At 12h50 on Thursday (15 April), the rand was trading at the following levels against the major currencies:
- Dollar/Rand: R14.31 (-0.52%)
- Pound/Rand: R19.73 (-0.48%)
- Euro/Rand: R17.13 (-0.65%)
Nedbank’s data shows that local financial markets have also strengthened in the first quarter, with the FTSE JSE all share index gaining by 13% since the start of the year, boosted by rallies in basic materials and industrials, which increased by 18.7% and 13%, respectively.
“Investors are starting to price in the prospect of a strong upturn in global commodity prices based on the potential impact of highly stimulatory policies in advanced countries on demand for commodities.
“If the Biden administration’s plan to spend close to $3 trillion on economic infrastructure and green energy is approved, it would add even further fuel to the commodities rally.”
In sharp contrast, financials managed only a modest gain of 2.5% since the start of the year, Nedbank said.
“Financials continue to be held back by lingering concerns over impairments and the threat of further sovereign risk rating downgrades given the perilous state of government’s finances and the surge in the public debt burden.”
The group forecasts that equities are likely to perform relatively well in 2021, supported by upbeat global investor sentiment and hopes of a robust global recovery.
“The main downside risks are still the threat of stricter local lockdowns and concerns about South Africa’s poor fiscal metrics,” it said.