6 reasons why the rand is back from the dead
The rand has seen strong gains in recent days – rallying from R15.04/$ to R14.22 in a week.
Here are some of the main reasons for its current run:
1. Delay in the Moody’s announcement
There was apprehension ahead of the credit rating agency’s latest decision on South Africa’s sovereign debt rating, which was expected last Friday.
Moody’s is the only credit rating agency that has kept South Africa at investment rating. But the agency decided not to announce its decision, which is now only expected after the medium-term budget next week.
If SA lost its investment rate grade from Moody’s, it would have cost the country its place in the most important group of government bonds. The Citigroup’s World Government Bond Index contains only bonds that are investment grade.
All the massive investment funds that track the index would have been forced to sell their South African government bonds. It has previously been estimated that foreigners would have to sell South African bonds worth R200 billion. This would have lowered the value of our bonds, and make it much more expensive for government to borrow money to keep the country afloat.
2. Donald Trump’s attacks on the Fed
The dollar has been taking strain amid the US president’s repeated attacks on his country’s central bank. Trump does not like the fact that the US Federal Reserve is hiking interest rates."I think the Fed is making a mistake. It's so tight. I think the Fed has gone crazy," Trump told reporters last week.
....The United States should not be penalized because we are doing so well. Tightening now hurts all that we have done. The U.S. should be allowed to recapture what was lost due to illegal currency manipulation and BAD Trade Deals. Debt coming due & we are raising rates - Really?— Donald J. Trump (@realDonaldTrump) July 20, 2018
Higher interest rates make a currency more attractive: investors in that currency earn a higher rate of return.
3. Weaker US inflation
A central bank will hike interest rates to protect an economy from inflation. But the latest US inflation numbers, released last week, show that September inflation is now only 2.3% - from 2.7% in August and 2.9% in July
“I think the Fed will continue on its gradual interest rate hiking path. But for now there seems to be less risk of a sharper-than-expected Fed interest rate hiking cycle,” Arthur Kamp, economist at Sanlam Investments, told Business Insider SA.
4. The Mboweni effect
Kamp believes the biggest reason for the rand strength is the appointment of Tito Mboweni as minister of finance.
“In policymaking, good track records are important. Of course, Mboweni does not have a track record yet in fiscal policy, but he has a good track record in monetary policy.
“Inflation targeting was first implemented (successfully) during his tenure as Reserve Bank governor. From this perspective the Treasury’s support of the current inflation targeting regime and the Reserve Bank’s mandate is likely to continue.
“That’s important because in a time of currency volatility the central bank is the anchor for inflation expectations and the currency.
“If the bank does what is needed (unfortunately that sometimes implies interest rate hikes) to keep inflation expectations anchored at a low level then there is a good chance the currency will settle – over time,” Kamp said.
5. The rand was oversold
Sanisha Packirisamy, an economist at Momentum Investments, believes the rand was unfairly sold off over recent weeks, as the market lumped South Africa with Turkey and Argentina. South Africa is in healthier shape than these countries, she believes.
“SA’s current account deficit is smaller than that of Turkey (...) and it has a credible and independent central bank.
“Assets in Brazil and SA (and more recently in countries which have done significant amounts of structural reform, including Indonesia, India and the Philippines) have been sold given the depth and liquidity of their markets.
“As such, these countries acted as proxies for the countries which experienced economic mismanagement in the last while and were unfairly sold off,” says Packirisamy.
When markets are worried about emerging markets, the rand gets hit first because it is a very liquid currency.
This means that traders know they can get in and out of the rand very quickly as there are massive amounts being traded in the rand every day. In fact, the rand is the 20th most traded currency in the world – it attracts much more action than the currency of Poland, with an economy 60% bigger than the South African GDP.
6. More hope for emerging markets
For a long time, emerging market currencies have been shunned amid concerns about Turkey and Argentina.
But a new Bloomberg survey among more than twenty fund managers shows there are more professional investors who are bullish about the prospect of emerging markets, than those who are negative:
Forecast for the rand
Analysts polled by Bloomberg at the end of last month, expected the rand to end the year somewhat weaker than at current levels. The median forecast for the rand versus the dollar by year-end is R14.75.
Paul Makube, senior agricultural economist at FNB Agri-Business, thinks that the medium-term budget statement, which will be released on 24 October, will provide some direction for the rand.
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