The South African rand moved below R14 to the dollar on Monday morning (10 May), as it benefited from strong commodity prices, subdued US jobs data, and positive local news.
The extended run means that the local currency is now at a 16-month high against the greenback.
“The key drivers were strong global risk appetites, a weaker US dollar, robust commodity prices, better-than-expected domestic fiscal outcomes and encouraging signs that the ruling party started to take action against corruption within its ranks,” Nedbank economists said in a research note on Monday.
The group added that risk appetites among international investors are likely to remain healthy throughout 2021, buoyed by the vaccine-led global recovery, the ultra-accommodative monetary policies of the world’s largest economies and increasingly aggressive fiscal stimulus, especially in the US.
“The global drive to rebuild infrastructure and transition to green energy also bodes well for commodity prices over the medium term, although some correction is likely over the shorter term.
“These forces will eventually encourage greater interest in emerging market economies. The rand will benefit from these trends, but the upside will be limited by domestic factors, particularly high fiscal risks, energy shortages and uncertain growth prospects.”
Nedbank’s analysts said that the rand is currently fairly valued based on its calculations of purchasing power parity. “We think the upside for the rand is quite limited but expect the currency to hold value in 2021.”
The rand was trading at the following levels against the major currencies at 12h20 on Monday:
- R14.00/dollar (-0.34%);
- R19.74/pound (+0.44%);
- R17.03/euro (-0.53%).
The expectations of a robust global recovery continue to fuel risk appetites, Nedbank said, with risk appetites strengthened noticeably over the past two months.
This comes after a soft start to the year when investors grappled with the third wave of Covid-19 infections in Europe, high infection rates in the US, the violent insurrection in Washington and the implications of aggressive fiscal expansions for inflation and portfolio allocations.
Since then, the mood has brightened due to:
- The rapid rollout of Covid-19 vaccines in some countries, notably the US and the UK. Europe’s vaccination drive got off to a slow start, beset by setbacks in vaccine procurement, briefly paused on safety concerns and undermined by pockets of vaccine scepticism among the population. Even though the Eurozone continues to lag the UK and the US, vaccinations have picked up considerably over the past month.
- Reduced viral transmission rates in the US, the UK and much of Europe enabled countries to reopen more industries, lifting sales, production and trade in the process.
- Investors have mostly welcomed the continued and aggressive expansions to the fiscal stimulus in the US and a few other advanced countries, opting to focus on the boost to economic growth and job creation rather than the implications for public debt, future tax rates, inflation, and monetary policy over the medium to longer term.
- Global inflation fears have receded somewhat, albeit not wholly dispelled. There is a consensus emerging among investors, particularly in the equity market, that the spike in inflation will be temporary and unlikely to persuade the US Fed to reverse its ultra-stimulatory policies. Fed chair Jerome Powell said as much on several occasions and once again explained the Fed’s view after the April FOMC meeting, reiterating the Fed’s commitment to stay the course until employment returns to its pre-lockdown glory.
- A slew of better-than-expected economic outcomes also helped reinforce risk appetites, fortifying investors’ newfound conviction that a recovery is underway and likely to be much stronger than initially thought. The better-than-expected results in the second half of last year and the early part of this year have led to significant upward revisions to global growth forecasts (See table 2). The consensus is for world growth of just about 6% this year and around 4% next year, with the US and China expected to lead the charge.