President Cyril Ramaphosa’s efforts to distance South Africa from a perceived alignment with Russia are bearing some fruit as attention shifts to global markets and away from load-shedding and other home-grown crises in determining the rand’s direction.<\/p>\n\n\n\n
After weeks of uncertainty over grid collapse and worries that South Africa’s ties to Russia could invite Western sanctions, investors and global markets have finally eased off punishing the rand.<\/p>\n\n\n\n
The rand was pushed as high as R19.92 to the dollar in recent weeks after worries over sanctions – however unlikely – resonated through the local markets. This risk was becoming more prevalent as South Africa was perceived to be aligning itself with Russia in its ongoing war in Ukraine, despite claiming neutrality.<\/p>\n\n\n\n
Pressure on the local unit was also arising from questions over whether Russian President Vladimir Putin would attend a BRICS summit – scheduled to be held in South Africa in August – in person. <\/p>\n\n\n\n
The International Criminal Court has a warrant out for Putin’s arrest for alleged war crimes, and South Africa, as a party to the court, would be obligated to execute it. <\/p>\n\n\n\n
However, these concerns have cooled off – for now – with Putin reportedly likely to give the summit a skip. At the same time, South Africa, through Ramaphosa, has taken a firmer stance in calling for an end to the war and settling into a position of neutrality.<\/p>\n\n\n\n
This has allowed the rand to settle under R19 to the dollar, with the unit currently trading at R18.50 against the greenback.<\/p>\n\n\n\n
At one stage, the rand was looking at a move towards R18 to the dollar, but has since pulled back and lost some ground.<\/p>\n\n\n\n
According to Investec chief economist Annabel Bishop, while the rand is not particularly strong – and has not recovered to levels seen at the start of the year – it is at least currently being driven by movements in global markets rather than the crises back home.<\/p>\n\n\n\n
“The rand is likely to remain volatile, influenced by global events more heavily currently, as lower load shedding stages and President Ramaphosa\u2019s recent efforts to strike a more neutral balance in global geopolitics have been overshadowed,” she said.<\/p>\n\n\n\n
The global factors driving a weaker rand are a risk-off sentiment that affects volatile emerging markets like South Africa.<\/p>\n\n\n\n
Bishop noted that markets are jittery due to veiled messaging from the US, particularly around the Fed’s intentions to continue hiking rates. Meanwhile, geopolitical risks from the Russia-Ukraine conflict persist, and worries and uncertainty still abound over the potential for a recession.<\/p>\n\n\n\n
“Markets have been reassessing the juxtaposition between additional interest rate hikes and a slowing economy, despite some more optimistic forecasts, and the heightened uncertainty has also added to a more risk-off environment,” she said.<\/p>\n\n\n\n
With the rand being both an emerging market and commodity currency, it is negatively affected by rising
uncertainty in global financial markets, Bishop said, which in turn tends to result in US dollar strength on an attraction to safe haven investments.<\/p>\n\n\n\n
However, local issues are not completely absent from market direction.<\/p>\n\n\n\n
There are concerns that South Africa will still see a weak economic growth year – if not a recession – and not enough has changed for investor sentiment to shift on local markets, Bishop said.<\/p>\n\n\n\n
“Markets also worry about the government\u2019s increased appetite for nationalisation in the healthcare sector and on expropriation without compensation, reducing foreign appetite for investment in equities and bond, on worries over the health of future state finances and economic growth,” she said.<\/p>\n\n\n\n
Despite the more positive direction for the rand, Investec’s baseline for the currency is that it will remain on the back foot in the near-term and is likely to average above R18 to the dollar for the year.<\/p>\n\n\n\n