Rand shows global issues eclipse local woes

State capture, violent protests and lacklustre growth would suggest that the rand should be one of the worst performers in the currency market, but a cursory look at its performance versus the pound would seem to suggest that the British have a bigger problem.

The rand has lost about 3.5% against a rampant dollar in the past month as US treasury yields climbed past 3%, emerging markets suffered from risk-off trade and oil prices rose.

Against the UK currency the rand rose about 2%, pushing its gains since Britain voted in June 2016 to leave the EU to about 22%. Rand stability so far in 2018 has surprised analysts, although in recent weeks a resurgent dollar has created additional volatility.

Despite this, the rand is poised to strengthen further, said Herenya Capital’s Petri Redelinghuys. Excluding possible shocks, the rand could firm to about R11.50/$ by year end, and R10.50/$ 12 months from now.

Protracted domestic political battles over patronage aside, and the implications of positioning state-owned enterprises as the centrepiece of government economic thinking, the rand remains in favour, providing some indication local problems will remain overshadowed by global ones. Analysts maintain Britain’s divorce from the EU remains a far larger factor for rand strength against the pound than SA’s divorce from Jacob Zuma.

This year began with expectations that it would be a testing one for emerging market currencies, as signs of synchronised global growth fuelled expectations that major central banks will begin to unwind almost a decade of unprecedented monetary policy stimulus.

However, global volatility prompted by trade wars, as well as political uncertainty in Europe, including Brexit, have provided some context for SA’s noisy domestic political situation. There is even some concern now that foreign holding of SA’s bonds, which has supported the local currency, has become a risk factor in itself.

The rand has now unwound some of the gains based on the expected economic reforms and a greater focus on growth under the administration of President Cyril Ramaphosa, but analysts expect this positive sentiment to continue. While Ramaphoria has unwound somewhat, the continued stability of the rand has raised eyebrows, while there are already signals that global central banks may be pumping liquidity into global markets for far longer than anticipated.

Relatively higher local interest rates are also supporting the rand in the traditional carry trade, where investors borrow low-rate currencies and invest in higheryielding ones.

This has supported the rand — and other emerging market currencies — while recent weak economic data and volatility from global geopolitical events has concerned many monetary policy makers.

The Bank of England opted not to proceed with a widely anticipated interest rate increase in May, with governor Mark Carney going on record that further normalisation could be delayed by Brexit. The rate at which wages, and therefore price pressures, had been increasing had been affected by a lack of increased productivity and investment.

Although investors are focused on economic fundamentals and expectations around central bank moves, the fears around Brexit are still lurking in the background, says research analyst at FXTM Lukman Otunuga.

“While there was a sense of relief following the agreement on a Brexit transition deal, there still remains no solution to the Northern Ireland border [issue]. With the clock ticking and the final Brexit deadline looming, the pound is likely to remain vulnerable to losses.”

Global monetary policy normalisation is, however, inevitable and is also on the mind of the Reserve Bank’s monetary policy committee, calling into question further interest rate cuts here.

International uncertainty even prompted Reserve Bank governor Lesetja Kganyago to surprise observers by warning in March that the rand may very well be overvalued.

Among the risks to the local currency and to inflation are the possible sell-off of foreign-held bonds as global central banks increase rates.

While foreign sales remain a risk, there is at least no risk of the government not being able to fund itself, according to Old Mutual Multi-Managers strategist Dave Mohr.

SA’s current account deficit has halved as a percentage of GDP since the 2008 taper tantrum prompted a sell-off of emerging market bonds. While the fiscal deficit remains sticky, the most recent budget aims to address it more vigorously and realistically than previous versions, says Mohr.

“Investors certainly have more faith in President Ramaphosa implementing key reforms than his predecessor.”

Another reason to be optimistic is the recent performance of US equity markets, which showed investors were buying stocks in a more broad-based manner, as opposed to just piling into larger global companies. This will have a spillover effect into emerging markets, including SA, says Redelinghuys.

INVESTORS CERTAINLY HAVE MORE FAITH IN … RAMAPHOSA IMPLEMENTING KEY REFORMS