It’s becoming easier to back world-beating rand

The rand’s 30% gain against the dollar since the height of the pandemic has outstripped emerging-market peers – and the rally may not be over yet.

The currency has recovered all its losses since it slumped to a record in April last year, and then some. Strong commodity prices and the global search for yield should support the narrative for further gains in coming months. Domestic fiscal metrics are improving along with terms of trade, while the government’s crackdown on corruption is also fuelling positive sentiment.

It’s becoming easier to back the rand, and here’s why:

Bond investors return

After record outflows from South Africa’s bond market in the first four months of the year, last week’s disappointing US jobs numbers heralded a reprieve. Foreign investors bought a net R5.2 billion of South African government debt on Friday as the move lower in Treasury rates gave new impetus to the search for yield.

Technical cheer

The dollar last week tested a pivotal area at R14.40-R14.50 after consolidating in the second half of April. Failure to breach resistance meant that rand bulls got the upper hand once again. The rand seems to be in the final stages of the ABC correction of an Elliot Wave Cycle that started in 2011 and was completed in early 2020. The dollar may weaken toward the R11.50 handle, according to the pattern.

Encouraging options

Demand for dollar topside exposure took a hit as key resistance around R14.50 held. While greenback calls still trade at a premium, bearish sentiment for the South African currency has moved to the lowest level in three weeks, with room to extend toward February range extremes.