Commodity prices, Brexit, Trump spur rand recovery
Receding perception of political risk in South Africa boosts momentum
THE rand blasted through the R13/$ barrier this week for the first time in more than a year on the bumpy road to recovery.
A year ago it sank to record lows of nearly R17 to the greenback, helping to pull the trigger on a cumulative 75 basis point interest rate increase by the Reserve Bank as a pre-emptive attempt to rein in inflation.
But since then, the rand has recovered ground substantially, and not only against the dollar but also against the euro and pound — although the latter currencies are also under pressure from political uncertainty in the EU, most notably because of Brexit.
The rand’s improving fortunes have partially tracked the steady recovery of commodity prices, although the receding perception of political risk in South Africa has also boosted momentum.
South Africa generates significant foreign exchange earnings through exports of commodities such as iron ore, the price of which has rallied from a low of $38 (about R498) a ton in 2015 to $92 a ton this week.
“It does appear that firmer commodity prices are helping the rand, but the overall investment climate has become a lot more favourable to emerging markets,” said Izak Odendaal, an investment strategist at Old Mutual Multi-Managers.
The emerging-market universe has been relatively calmer in recent weeks, following the volatility that coincided with the election of Donald Trump as US president.
The Mexican peso, which threatened to crumble in the face of Trump’s isolationist and protectionist stance, has stabilised after hitting a series of record lows in the days leading up to his inauguration on January 20.
The positive sentiment has also played out in the stock markets, which have broadly outperformed their peers in the developed-market space since the start of the year.
Nonresidents’ net purchases of stocks and bonds in emerging markets jumped from $31-billion in December to $47-billion in January, the biggest inflow since April 2015, according to data from Capital Economics.
Apart from playing a critical role in determining South Africa’s inflation profile, which shapes the Reserve Bank’s stance on interest rates, the rand’s behaviour is closely monitored by companies as it can be a swing factor in their profitability.
The investment climate is more favourable to emerging markets
The local currency has been on a weakening path since at least 2011, boosting in particular industrial companies that earn most of their income in foreign currencies.
The weaker rand has also provided a cushion to mining companies that were reeling from the blows of low commodity prices until last year.
Although importers, ranging from car dealerships to pharmaceutical companies, have felt the squeeze, the latest trends suggest the rand could be moving into a strengthening phase, which would favour importers over exporters.
The local currency has been relatively resilient to the globally strong dollar, suggesting that the market has discounted the prospect of high interest rates in the US.
The rand rallied this week to highs of 13.90 to the dollar, its best level since August 2015.
“The rand’s rally has been in the context of resumption in global risk appetites for emerging markets,” said Mohammed Nalla, head of strategic research at Nedbank Corporate and Investment Banking.