Rand shakes off election jitters – eyes move under R18 to the dollar

The rand has started the week on the front foot, strengthening as South Africa’s election risk premium dissipates – and it may even test a move under R18 to the US dollar.

On Monday (20 May), the rand traded as low as R18.11 to the dollar as pre-election polls pointed to a more settling ‘status quo’ for South Africa in the coming elections.

Contrary to previous polling, which showed the governing ANC move below 45% of the national vote—inviting anxiety and uncertainty of how the country’s political makeup with look after 29 May—the latest numbers show the party in a stronger position.

According to Investec chief economist Annabel Bishop, an ANC under 45% sparked worries that the ruling party would hop into potentially damaging coalitions, such as a team-up with the anti-business EFF.

However, an ANC above 45% allayed concerns – with expectations now of an ANC coalition with the centrist IFP party instead.

The economist warned that another Ipsos poll is expected before the election, which could swing sentiment again.

“While the polls do show a significant, if not absolutely precise, degree of accuracy, an unexpected outcome where the ANC does decide on a national coalition with the EFF would then result in very severe rand weakness, negatively affecting inflation,” she said.

In addition to the waning political risk premium, S&P Global on Friday maintained South Africa’s credit outlook, which was widely expected by the market.

Bishop said that the S&P outcome, while providing some underpinning, was not the main driver of the rand, “which is likely to try the key resistance level of R18.00/USD this week, with foreign purchase of SA bonds strongly positive this quarter to date”.

She noted that other factors are also at play, favouring the rand. These include:

• US economic data showing inflation moving in the right direction, while the retail sales outcome was modest to weak, below market expectations, adding support to expectations of a US rate cut in Q4.24, if not in September.
• The lift in commodity prices has also benefited the domestic currency, with Q2.24 so far seeing an 7.9% lift on the first two months of Q1.24, with the rand a commodity currency, benefiting from improved international commodities prices.
• Falling oil and petroleum product prices (SA’s key import) and rising metal and minerals prices (SA’s key export), has placed the trade account in a sweet spot, allowing the terms of trade to likely benefit, and so the rand.
• South Africa continues to see low usage of its open gas cycle (diesel fired) generators, on a “steady ongoing improvement in reliability of generation fleet leading to sustained generation performance”.

By 15h30 on Monday the rand was trading slightly weaker against major currencies:

• ZAR/USD: R18.27 (-0.55%)
• ZAR/GBP: R23.20 (-0.52%)
• ZAR/EUR: R19.84 (-0.30%)

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