Some hope for the cur­rency

Risks may al­ready be priced in

Financial Mail - Investors Monthly - - Analysis: Technical -

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

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