Some hope for the currency
Risks may already be priced in
The rand’s fortunes have been closely tied to the recent volatile political climate in SA. The currency was at its worst levels in December and January, when the fiasco around the finance minister’s firing was at its peak. These woes added to the seasonal weakness that has been a frequent occurrence in January and December over the past decade. However, the currency has gradually been recovering through the first quarter of 2016.
The political influences on the rand remain elevated, but many of the recent news headlines seem to suggest that democracy and democratic institutions are winning in the South African political landscape. This is a boost for investor confidence.
The appointment of Pravin Gordhan as finance minister and the general weakening of President Jacob Zuma’s political capital has been welcomed by the investment community. This is proving to be a tail wind for the rand, notwithstanding the weakening of the US dollar and the British pound.
Many domestic risks still exist in SA, such as low economic growth and the possibility of a credit ratings downgrade later this year, but these are not new risks and one could argue that the currency is already pricing them in at the current rate.
From a technical perspective, the long-term trend of the rand against the dollar comes in at R13.80/$. That is still about 6% stronger than the levels at the time of writing. The long-term trend of the rand against the pound comes in at R20, about 5% stronger than current levels.
Given that we probably saw the peak of the recent rand blow-out in January this year, the odds seem to favour the currency strengthening a little further in coming months, albeit gradually.
One must keep in mind that the near-term call for a strengthening rand must be balanced against the long-term trend of rand weakness against the dollar and the pound. It will be very interesting to see how the rand responds if and when it gets