LATEST: Rand slips back over R12/$ again

Cape Town - The rand has weakened again, crossing back over the R12/$ threshold on Friday morning.

By late morning the local unit was trading at R12.02 to the US dollar, after having opened at R11.85/$.

The rand broke the R12/$ barrier for the first time since 2015 on January 24 this year, strengthening to R11.81 the following day.   

According to Gerrit van Rooyen, an economist at NKC African Economics, emerging market currencies were generally weaker on Friday morning after US bond yields spiked higher overnight.

The spike was due to increased expectations of higher future US inflation.

"If the US jobs data release, due later (on Friday), is stronger than expected, the rand could weaken further. Having said that, the rand is one of the worst performers among emerging market currencies (Friday morning), which may indicate that recent reports suggesting that President Jacob Zuma will not step down before the State of the Nation Address (SONA) is adversely affecting investor confidence," explained Van Rooyen.

Wichard Cilliers, currency dealer at TreasuryOne, told Fin24 that emerging markets have had a very good run for the past six weeks, and one sees some profit currently being taken.

He also pointed out that US treasury yields are still "on the up", so this was part of the slight sell-off in emerging market currencies like the rand.

"We also need to keep an eye on US non-farm payrolls (Friday) afternoon to see if the sell-off will accelerate or not," he added.

RMB's currency economist John Cairns said rand trends remain closely tied with those of the entire risk and commodity-currencies basket - primarily the dollar trend and the new additional impact from Treasury yields.

"However, within the basket, the rand went from outperformer on Wednesday to underperformer on Thursday, as optimism about local politics waxes and wanes," he added.

Tom Elliot, international investment strategist at the deVere Group, said the rand has been increasingly sensitive to domestic politics over the past decade.

It fell to its weakest point in December 2015 (R16/$) when Zuma reshuffled finance ministers. And it jumped sharply late last year when Deputy President Cyril Ramaphosa was voted president of the ANC, putting him in pole position to succeed Zuma as president.

"Since then there has been speculation that Zuma may step down early, and Ramaphosa has presented an optimistic vision of SA for investors at Davos. Both of which have further boosted the currency, which rose to below R12/$," said Elliot.

However, he added that while a stronger rand may reflect an improved political outlook for the country, it is not - perhaps ironically, in his view - what is best for the economy.

"Given SA’s reliance on exports for economic growth, a stronger rand may deter sales and lead to weaker output growth. Consensus forecasts for gross domestic product (GDP) growth last year are for a modest 0.8% increase over the previous year," he said.
 
The weakness of the dollar in recent weeks has also been an important contributing factor.

"A rand-based investor may wish to hedge against further rand appreciation through taking out derivative positions, or from buying ‘hedged into rand’ share classes available from mutual fund providers. This assumes a further strengthening for the rand. But given the uncertainties of South African politics, and the many structural problems facing its economy, betting on further long-term appreciation of the rand may prove frustrating," said Elliot.
 
"The alternative is for investors to not hedge against further rand appreciation, but instead to ensure that any overseas currency exposure is widely diversified amongst a number of hard currencies which might include sterling, the euro as well as the dollar. This will offer some protection against dollar weakness."
 
He added that many South African investors would have developed a global lifestyle with a global spread of assets, and that they would perhaps account for their household wealth in dollars.

"From this perspective, the weak dollar/strong rand theme is good news that flatters the returns made on South African assets when expressed in dollars. For example, the MSCI South Africa index is up 8.5% in dollar since the start of January, but 3.7% in rand terms. Again, global diversification will help ensure that if/when the rand falters, the investment portfolio is not overly hurt," he concluded.

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