- The rand and other emerging market currencies have been strengthening as the dollar has weakened.
- The local unit has been the best performing emerging market currency on a year-on-year basis and since the start of the year, says Investec chief economist Annabel Bishop.
- Since April 2020's record low of R19.30 to the dollar, the rand has recovered most of its losses as it moves toward the R14/$ mark.
The rand and other emerging market currencies have made gains in the past week, with the US dollar experiencing weakness.
The local unit started the day at R14.21 to the greenback. Analysts, however, expect it to trade within a tight range of R14.18 and R14.29.
"A break below R14.18/$ will open the door for levels closer to the R14.00/$ mark," Bianca Botes, executive director of Citadel Global, said in a market note issued on Tuesday.
Last week the rand reached R14.14/$, having strengthened by about 2%.
"The rand is by far still the best performing EM currency, both on a year-on-year basis and since the start of the year," Investec chief economist Annabel Bishop said in a note on the currency.
Bishop explained dollar weakness is currently providing support to emerging market currencies. However, emerging market currencies are climbing up from substantial lows last year, when market sentiment was more risk-averse amid uncertainties of the Covid-19 pandemic.
The rand depreciated to R19.30/$ in April 2020, following a ratings downgrade further into junk status by Fitch Ratings amid the implementation of a nationwide lockdown to slow the spread of Covid-19.
Compared to a year ago, the rand has climbed 32.4% year-on-year from a low base of R19 to the dollar, Bishop said. "… there is also likely market appreciation on how SA handled its bond market rout a year ago, as well as its recent improved fiscal plans," said Bishop.
Bishop said that the rand was also benefiting from foreign purchases of South African bonds. "In particular, the reduction in government debt projections on the recent corporate tax led revenue overrun has doubtless improved investor confidence towards SA on the bond side, although markets will still be watching intently to see if fiscal consolidation is achieved," said Bishop.
Markets are currently more bullish about risky assets, which is to the benefit of the rand. South Africa is also showing progress in structural reform.
Commodity prices are also providing further support. Earlier on Tuesday, gold was up at $1 771, platinum was trading stronger at $1 211. Palladium, however slightly lower at $2 810.
"The sharp elevation in commodity prices have also benefited the domestic currency, which is both an EM and commodity currency, with the run in commodity prices not yet expected to be over as global markets anticipate ongoing marked global economic recovery," Bishop said.
Th rand could still take a knock, especially if markets become risk-averse again, Bishop warned.
Bishop expects the rand to average R14.50/$ for April, compared to a previous projection of R15.30/$.
Bishop said the traditional "sell-in-May and go-away phenomena", which adversely affects emerging market currencies as investors opt for less risky investments while they are away on vacation, might not feature this year. The Covid-19 pandemic and lockdown restrictions would keep investors home, and they may continue to maintain existing risky assets. This would see the rand appreciate, but there will be a correction at some point, Bishop explained.
Other risks to rand strength in May include potential rating downgrades and "materially higher" inflation.
The Reserve Bank sees inflation climbing up but not deviating from the 4.5% midpoint of the target range of 3% and 6%.