Surprise: The rand just rallied to its strongest level in weeks
- Bucking strong local and global headwinds, the rand strengthened to a range last seen weeks ago.
- Less than a month ago, the local currency was more than a rand weaker against the dollar.
- But its winning streak could come to an end if Wednesday’s medium-term budget paints a grimmer-than-expected picture.
- For more articles, go to www.BusinessInsider.co.za.
In a surprising turn of events, the rand was trading around its best level for weeks on Tuesday.
On Tuesday early evening, it was trading at R16.13 after strengthening to R16.09/$ earlier in the day. Less than a month ago, it was trading at R17.18.
(Tuesday's level did not, however, breach a brief, intra-day record in September.)
The local currency has now strengthened 3% in a week – an unexpected development, ahead of what will be a grim medium-term budget, presented by finance minister Tito Mboweni on Wednesday. Government faces a sharp reduction in tax revenue, and a struggling economy, while its debt has ballooned. Mboweni will have to present realistic plans of steep spending cuts to keep the market happy. Even then, if he reveals a worse-than-expected fiscal picture, the markets will take fright.
Meanwhile, Bloomberg reports that South Africa’s talks with the World Bank over a $2 billion loan have stalled. The bank apparently demands that South Africa cuts its wage bill and agrees that the loan money won’t be used to bail out state-owned enterprises. Negotiations started in April.
The rand is also supposed to face headwinds from overseas, with global markets under pressure as investors fret about new lockdowns in Europe, record high daily Covid-19 cases in the US as well as the lack of a new economic stimulus plan in that country. Usually such a cocktail of uncertainty would cause investors to adopt a more risk-averse stance, and dump riskier assets like the rand.
This didn’t happen on Tuesday, however, and the rand also took the sharp fall of its emerging market peer, the Turkish lira, in its stride. The lira slumped to a record low amid a political spat with France. France pulled its ambassador from Turkey on Sunday after Turkish President Recep Tayyip Erdogan suggested his French counterpart Emmanuel Macron needed a mental health check-up. Erdogan's comments came after Macron criticised Muslim communities in France following the 16 October killing of a schoolteacher who had shown his class cartoons mocking the Prophet Muhammad.
The rand gained against all the major currencies on Tuesday, and was last trading at R21.04/pound and R19.09/euro.
But its current winning streak is not a one-way bet.
Over the short term, its trajectory will be heavily influenced by how markets react to the medium-term budget speech on Wednesday, says Lukman Otunuga, senior research analyst at FXTM. If South Africa’s fiscal deficit widened by more than was projected in June’s emergency coronavirus budget, the rand could take a bit hit.
Independent analyst Johann Biermann believes the rand is in for choppy trading towards the end of the year. Apart from uncertainty over SA’s fiscal conundrum, new lockdowns in Europe could even be followed by a lockdown of its own in the US, should Democratic nominee Joe Biden – who looks to take a more aggressive stance in containing the virus - win the election.(This article has been updated to reflect that the rand is trading at its best range for several weeks.)
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