Rand and banks ride wave of optimism

SA’s financial markets rode a wave of optimism about a global economic recovery from the Covid-19 pandemic, pushing the rand to its strongest level since before the country imposed its national lockdown, while banks surged to their biggest one-day gain in more than two decades on Wednesday.

The rand extended its recovery on Wednesday and broke through R17/$, while the JSE reached its strongest level since early March.

Bond yields were at their lowest level in more than three months, signalling that SA’s debt is regaining favour despite a downgrade to junk and the prospects of a jump in government borrowing due to the deepest economic slump in a century.

Local markets are gaining with their global counterparts after central banks and governments created unprecedented monetary and fiscal stimulus amid the coronavirus outbreak.

The Reserve Bank cut interest rates to a record low and announced a raft of measures to boost bank lending, while the government pitched in with R500bn in relief measures.

The rand was 1.39% stronger at R16.90/$ at 6.15pm, after earlier reaching R16.87 — its strongest since March 18, about a week before the downgrade by Moody’s Investors Service.

It is up 11% over the past month, making it the secondbest performer among emerging markets, according to Bloomberg data, after having led declines between March 27 and April 6, when it hit a record low above R19/$.

While local markets have also benefited from the country’s easing of its lockdown and opening up of economic activity, the speed of the recovery has caught some investors by surprise. Forecasts for the future are still relatively wide, reflecting uncertainty about the outlook.

The Reserve Bank expects GDP to contract 7% in 2020, while Investec said on Wednesday that it expected a decline of 10.1%.

“On the rand front we are still facing a lot of issues as a country on our own, without even involving the global economy,” said Matete Thulare, a currency dealer at Rand Merchant Bank.

While the rand could strengthen to R16.50/$, this “depends on the severity of the bad or good news we get”.

SA bonds gained, pushing 10year yields, which move inversely to the price, down 8.5 basis points to 8.63%, their lowest close since July 18 2019.

The yield, a key barometer of investors’ assessment of the government’s creditworthiness, rose to a record 13.29% on March 24. It has since also been supported as the Bank bought securities in the secondary market — from banks and asset managers as opposed to directly

from the government to restore liquidity in the market.

The JSE all share was up 2.19%, pushing its 2020 loss down to about 6%. Reflecting the general lack of demand for safehaven assets, gold stocks underperformed, falling 7.36%, the most since May 21.

The banks index leapt 10.42%, its biggest one-day gain since January 2000.

The main driver was “improved investor appetite for riskier assets fuelled by mounting optimism around a swift global economic recovery”, said Annatjie van Rooyen, CEO of MyWealth Investments. She expects the rand to trade between R15.60/$ and R17.70/$ in the next six months.

“Emerging-market currencies are enjoying support on the back of green shoots emerging in global markets as a result of lockdowns being eased.”