Rand shows local strife can’t derail emerging gains

FOR EVIDENCE that fundamentals hardly matter in today’s world of easy money, look no further than the rand.

In a quarter marked by a political feud between South Africa’s president and his finance minister, stagnant growth and mounting concern that the country may lose its investment-level credit status, the rand returned 11 percent for investors selling the dollar to chase higher yields – more than twice as much as its nextbest peer. It received a further boost in the past two days as the Federal Reserve and Bank of Japan maintained a commitment to loose monetary policies to boost their economies.

The pace of gains means that all but one forecaster predict it will weaken by year end, even though the median estimate has been strengthening all year. HSBC Holdings is breaking ranks, predicting the rand will appreciate 4 percent by year end and the same amount next year.

Negative impact

“We think that the direction is actually the right one,” said Murat Toprak, the HSBC’s head of currency strategy for emerging markets in Europe, the Middle East and Africa.

“The political situation is an important element, but usually it tends to have a big but a temporary negative impact. The second-most important thing is the global factors, which are supportive.”

While the rand is the best example of an emerging market asset benefiting from global money flows, it is not the only one. Exchange-traded stock and bond funds registered $20.5 billion (R280.3bn) of uninterrupted inflows in the past 16 weeks as shares from Johannesburg to Istanbul gained and currencies rallied.

The MSCI emerging markets currency index is up 1.1 percent this month and 2.1 percent since the end of June, heading for a third consecutive quarterly gain.

Morgan Stanley and Goldman Sachs said in the past week that developing countries had stronger economies than during the so-called 2013 taper tantrum, putting them on a better footing to withstand an eventual move away from ultra-loose monetary policy.

The rand was facing local headwinds. South Africa’s economy was forecast to grow just 0.4 percent this year after barely avoiding a recession, according to the central bank.

While the current account deficit narrowed in the second quarter, reducing the rand’s vulnerability, the trade surplus underlying that data probably would not be sustained in the second half, central bank governor Lesetja Kganyago said recently. The rand remained vulnerable to a credit rating downgrade, he said. “South Africa did itself a significant injustice with all of the political rumours, which really put the rand on the back foot,” said William van Rijn, a currency trader at Nedbank Group. “It was a comfortable trade for a significant period of time on the risk-off scenario” and was now returning to that position, he said. As long as the Fed kept rates unchanged, “we can see a continuation of the current price action”.

Forecasters expected the rand to weaken to R14.75 per dollar by year-end, from R13.66 as of 6.06am in London on Friday, though that prediction is stronger than the R16.70 estimate in February.

While currency traders pay a premium for options hedging against rand losses, prices suggest they have become less bearish as it becomes clear the Fed will hold rates beyond September. The extra cost for contracts to sell the currency in three months over those to buy has narrowed to 3.5 percentage points, from a seven-month high of 4.1 percentage points on August 31, data compiled by Bloomberg shows.

Threats remain to the currency from the potential ratings downgrade. S&P Global Ratings and Fitch Ratings are reviewing their assessments in December, increasing the risks of holding the country’s debt.