Rand’s rough ride hands rouble the edge

POLITICAL tension this week, which culminated in the firing of Pravin Gordhan as finance minister, helped other emerging-market currencies gain while the rand lost ground sharply against the dollar.

The rand was the best-performing emerging-market currency until a week ago, gaining at least 10% against the dollar and fanning hopes that, if the rally continued, a cut in domestic interest rates was likely this year.

But then the rand plummeted over 8% this week after President Jacob Zuma suddenly recalled Gordhan from an investor road show in London, fuelling speculation that he was about to fire South Africa’s third finance minister in nearly two years, which he did on Thursday night.

As turbulence knocked the rand to seventh place among emerging-market best performers this week, currency traders seeking higher yield diverted to Russia’s rouble, pushing the rand to its worst week since June.

Traders had gained about 11% in returns on the rouble so far this year, Bloomberg reported on Thursday.

Ricardo da Camara, an investment analyst at Marble Rock Asset Management, said: “The dislocation [of] the rand versus the other emerging-market [currencies] has been in reaction to the developments regarding the president and Gordhan.”

This was an advantage for Russia as it was seen to be an increasingly less volatile market than South Africa.

James Barrineau, a money manager at Schroders, said: “Russia . . . is embarking on a very prudent cutting cycle. They’re guiding market expectations very well, so it’s actually a pretty attractive story on that basis alone.”

Russia also pips Turkey, which is seen as a riskier investment and also has political challenges.

“The [Turkish] lira by comparison is still the weakestperforming [emerging-market currency] since the start of the year as the central bank there has been less prudent with its monetary policy,” said Da Camara. Its large budget and trade deficits had “inherently made the lira less robust compared with countries where the economy is run in a more balanced and prudent nature”, he said.

The lira was weaker by about 3.7% for the year to date on Wednesday, compared with a 10% appreciation of the Mexican peso, an 8% rise in the Russian rouble and a 4.2% appreciation of the Brazilian real.

On Thursday, the rand was 5.3% firmer as investors reverted to a “wait-and-see” approach for developments in the local finance ministry after selling the currency on Monday and Tuesday.

Lower commodity prices had previously added to currency woes for emerging markets, but commodity prices were now on the rebound. However, political uncertainty was now a significant risk.

The Mexican peso was battered after Donald Trump’s election as US president over concerns as to what his antiimmigration stance could mean for Mexico.

But a recovery in oil prices has helped the currency to play catch-up to other emerging-market currencies.

Brazil’s currency has been recovering since 2015 following a recession and downgrade of the sovereign rating to junk.

The rand had traded weaker against the dollar from 2011 to 2015. In 2015, it was 34% weaker against the US currency after Nhlanhla Nene was sacked as finance minister. The rand touched a low of R17.91 in January 2016, but by the end of the year it was 11.19% stronger against the greenback. It dipped to as low as R13.62 on Friday.

RMB currency strategist John Cairns said: “Even before the politics we were sceptical [of] significant further rand strength . . . So even if the politics now settled down, I suspect the rand will struggle to resume its strengthening.”

RMB had forecast a level of R13 to the dollar at the end of the year.

South African bonds also crashed, raising the cost of the government’s debt. One international firm said it would continue to hold local bonds.

BlackRock emerging-market debt head Sergio Trigo Paz said: “There is going to be noise. We have to live with it.” But this did not mean the government would stray from its fiscal path, Trigo Paz said.

Yields on government bonds surged to the highest level in more than a month this week as investors bought bonds at the fastest rate since June. As with the rand, the outlook for emerging-market currencies remained murky in the short term.

Da Camara said that at a fundamental economic level there were positive developments such as improved growth that could support the rand — but that this would be hampered by the uncertain political backdrop.

“Investors have become much more prudent . . . when they do look for some yield pickup, they tend to look for ‘the cleanest dirty shirt’,” Da Camara said. — Additional reporting by Bloomberg

Russia is seen to be an increasingly less volatile market