The rand is back at pre-lockdown, pre-junk levels - here's where it may be heading
- The rand has rallied against the dollar to levels last seen before the Covid-19 crisis.
- Some experts think the rand might strengthen to under R16/dollar.
- There's increased confidence in global markets that the worst of the coronavirus crisis is over, encouraging investors to return to riskier currencies.
- For more stories, go to Business Insider's home page.
On Thursday, the rand reached R17.58/$ - almost the exact level it was before the lockdown and South Africa’s downgrade to junk status at the end of March.
Last month it reached a record low of R19.26/$ amid a perfect storm of global economic paralysis due to the coronavirus crisis, and concern about South Africa's fiscal position.
The rand strengthened even though the SA's monetary policy committee announced another repo rate cut on Thursday.
A lower interest rate can be negative for a currency. Some traders hold the rand to earn its fat interest rates. But even with a benchmark rate of only 3.75% - the rand still offers a far better rate than most other major countries.
Some economists are now predicting the rand to strengthen to under R16/dollar over the course of the year.
“It’s going to be a marathon, not a sprint,” says Nolan Wapenaar, co-chief investment officer at Anchor Capital, but he’s confident that that the rand will break R16 again.
Dr. Azar Jammine, chief economist at Econometrix, thinks the rand could reach R16,50 this year. “The reason [the rand] fell so much initially wasn’t the downgrade, it was the Covid-19 crisis. People were getting rid of anything that seemed remotely risky – they were even getting out of gold.” The dollar is seen as a safe currency, which is why it strengthened during the crisis.
According to Wapenaar, emerging market currencies are back on the menu amid increasing confidence that the worst of the crisis might be over.
“As the fear factor comes down, emerging market currencies are back in vogue,” he says. However, a basket of emerging market countries viewed as fragile, including Brazil and South Africa, have been lagging the rally, he says. “I think what you see over the last few days is the rand playing catch-up.”
In general, “the sentiment towards financial markets has become quite positive as infections have been slowing, and it's created quite a lot optimism,” says Jammine. “The dominant factor is that the risk aversion to emerging markets is diminishing.”
Both Wapenaar and Jammine agree that the currency is heavily oversold.
Maarten Ackerman, chief economist of Citadel Investment Services, also expects the rand to rally, but only towards the end of the year.
“We’ll see some headwinds in the weeks to come which will put the rand under pressure, but the dollar will run out of steam,” he says. “We expect weakening over the short term, but strengthening over the medium term.”
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