Dire state of SA still impacts rand despite Ramaphosa optimism - experts

Cape Town - The rand will struggle to find the momentum to break meaningfully below the R11.80/$ target level, Bianca Botes of corporate treasury management at Peregrine Treasury Solutions said on Monday.  

The rand opened the week slightly weaker, trading above R11.90/$. By late afternoon it was up 1.01% at R11.96/$.

Botes explained that Monday's somewhat weaker rand is due to a slight uptick in the dollar after six weeks of consecutive losses. In her view, markets also seem to be a bit wary in anticipation of Eskom’s financial results due to be released on Tuesday as this could spark further volatility.

She said one must keep in perspective the dire state that SA still finds itself in as a result of weak economic fundamentals. This is despite the support that strong commodity prices and the weak dollar provided the rand.

According to Botes, factors driving current rand levels remain mostly the same as last week. These include continued strong commodity prices and a "soft" dollar.

"The National Prosecuting Authority (NPA) is also forging ahead at an impressive rate in the state capture debacle, assisting in the revival of positive investor sentiment in SA," said Botes.

According to Phillip Pearce, dealer at TreasuryONE, the key driver for forex markets at the moment is the weak dollar. In his view, the markets are confused "as the Trump administration cannot convey a clear message on whether they think the dollar should be weaker or stronger".

He said the slightly softer rand on Monday morning was due to the dollar finding "some stability" and as local SA politics begin to become "murky" as it seems the "Zuma faction" is launching a fight back.

Pearce expected range-bound trade of the rand on Monday to remain between R11.80/$ and R11.95/$.

Dave Mohr (chief investment strategist) and Izak Odendaal (investment strategist) at Old Mutual Multi-Managers said at first glance the rand having broken through R12/$ for the first time since May 2015 appears to be a continuation of the “Ramaphosa rally” as investors price in improved prospects for economic reform, policy certainty and corruption fighting.

However, they caution that, as is mostly the case, the global backdrop is crucial. Although the rand has strengthened 4% against the dollar this year, it has been flat against the euro and weaker against the pound.

"In other words, this is a weak dollar story, though the new positive sentiment towards SA certainly helps. Other emerging markets have also seen their currencies rally against the dollar," they said.

In their view, the explanation for the weaker dollar probably lies in the fact that it is expectations that mostly drive currency markets, not necessarily current interest rate differentials - which are still in favour of the dollar.

"The market priced in higher US rates long before they arrived. In other words, even though the European Central Bank (ECB) and Bank of Japan are currently accommodative, their next move is expected to be a tightening of monetary policy," they explained.

There is also, what they call "an element of dysfunction" in US politics.

They say another factor helping the rand at the moment is that global investor risk appetite is high, as surging equity markets illustrate.

"When investors are fearful, they tend to look for safety in the US. However, when fear recedes, they look for opportunities outside the US. There is an element of feedback, since a weak dollar is also beneficial to the giant multinationals listed in New York," they explained.

"From a valuation point of view, the trade-weighted dollar is still above its long-term average and therefore still has room to decline. Bullish investor sentiment towards emerging markets is another support for the local currency."

If new leadership in government can follow through with some quick-win reforms, the rand could hold its own, in their view. They think the rand is probably not overvalued against the dollar yet.

One of the positive impacts of the stronger rand is that it lowers the cost of imported items priced in dollars. Therefore, it softens the blow of the higher oil price.

Mohr and Odendaal say the SA Reserve Bank could cut rates once or twice, once the risk of the February National Budget and Moody’s subsequent ratings decision has passed.

"If the budget delivers tax hikes as expected, it strengthens the case for the Reserve Bank to lower interest rates to ease the pressure on consumers. However, the SARB’s insistence on maintaining relatively high real interest rates [around 2%] means deep cuts are unlikely," they said.

"It is also increasingly focused on getting inflation to the mid-point of the 3% - 6% target range, rather than just below the upper-end."

On the other hand, a stronger rand is negative for export earnings.

"Fortunately, the prices of commodities – accounting for about half of export revenues – have been relatively buoyant, reaching new cycle highs," they added.

"The stronger rand is clearly good for interest rate-sensitive assets, and bonds have rallied 2.2% this month already. However, longer-dated bond yields are still attractively high, above the average of the past decade and well above inflation, offering prospects for decent real returns."

As for offshore exposure, they said the stronger rand will reduce the rand value of dollar assets - such as the 25% offshore exposure most balanced funds hold. But the dollar values of these assets are still increasing and, in their view, the rand will one day depreciate again - one just does not know when.

"Therefore, now as ever, investors need to be patient. In the same way that overreacting when the rand crashed was a bad idea, they need to avoid a knee-jerk response to the currency’s newfound strength," they said.

"It is important to remember that local political developments cause short-term moves in the rand, while global factors will shape its longer-term trajectory."

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