A perfect storm rained on the South African rand’s parade this week, with the local currency weakening by 3.2% against the dollar since Monday and 5% since last Thursday. This is after holding up reasonably well against a surging dollar in the first two days after Donald Trump was named President-Elect in the US. With the recent changes in the dynamics of the currency markets, it is important to analyse this week’s rand weakness in the context of the drivers of its performance this year.
The rand started 2024 at R18.28/$ and powered to its best level in two years in September to touch R17.02/$ for a brief moment. In between, the currency has traded with its characteristic volatility at levels ranging from R17.60 to R19.30, depending on South African-specific factors as well as geopolitical developments and international macroeconomic factors.
On the global front, signs that the Fed and other major central banks had finally managed to beat back inflation and the resultant anticipation of the commencement of the rate-cutting cycle, were tailwinds for the rand. Local factors also mattered, given that the halo effect market participants had attached to the country following the formation of the Government of National Unity (GNU) in June combined with the end of loadshedding had caused the rand to outperform its emerging market peers.
With the Fed commencing an interest rate-cutting cycle in September, expectations would traditionally be for a risk-on environment to emerge. This means that emerging market currencies like the rand would typically strengthen in the absence of negative domestic influences, while the dollar would weaken. This year, however, the US presidential election complicated the outlook.
If Kamala Harris had won, we could have expected a more stable macroeconomic environment and continuity in terms of US policy. Without other macroeconomic factors such as geopolitical risk causing investors to flee to the safe haven of the dollar, we would have expected the dollar to weaken. But instead, Trump and the Republicans have made a clean sweep, opening the door to disruptive policy changes.
This, in turn, could set the stage for persistent dollar strength. The reason for this is that Trump favours policies that are likely to be inflationary, including tariffs and trading barriers, repatriating undocumented migrants, and running large budget deficits. More than two-thirds (68%) of economists recently surveyed by The Wall Street Journal believe prices will be higher under Trump than they would have been under a Harris presidency.
So it was that the the dollar spot index (measured against a basket of developed market peers) gained sharply this this week, in addition to rebounding strongly from its 25 September lows. Under these circumstances, it was entirely expected that emerging market currencies in general, but that the rand in particular as a highly liquid emerging market currency, would also feel some heat. However, our analysis indicates that the rand’s fall this week cannot be solely attributed to the policies of a pending Trump presidency and that there are also local factors at work.
We have argued in various editions of our Newsflash over the past few months that the rand has been trading consistently at a widening premium to our fair value model. On 1 November, our Currency Decoder calculated fair value at R18.28/$ at the time when the rand was trading at R17.64/$. It now appears that this week’s rand weakness – the currency being one of the worst performing emerging market currencies – was due to the unwinding of the bets placed on South Africa following the creation of the GNU, with growing trepidation that South Africa’s path to economic revival will be long and precarious. (The October Medium-term Budget Policy Statement set the three-year GDP projection at an average of 1.8% per annum.)
Yet, even after this week’s rand rout, the currency at R18.23/$ this morning is still trading at a slight premium to the dynamically adjusted fair value of R18.69/$ of our Analytics Currency Decoder. Interestingly, this level coincides more-or-less with the 34-year long-term trend line, which implies an annual depreciation of +-5.2% against the dollar.
The past week illustrates aptly why we avoid making short-term predictions on the rand/dollar exchange rate, preferring instead to use an attribution (decoder) model as a guideline to calculate the discount or premium to fair value that the currency trades at on a weekly basis.
In closing, as a result of Trump’s resounding victory, the start of this November has turned out to be a sweet spot for our clients, with a convergence of strong global equity markets and sharp rand weakness producing returns of up to 7% as measured in the local currency, compared to the local index that has fallen by 1.7%.
“The rand’s underperformance against peers reflects investor positioning. Once positioning is more balanced, the rand could return to outperforming due to South Africa’s reform story. But in a high-yield US environment, rand will still struggle.”
– Henrik Gullberg, a macro strategist at Coex Partners
Global News
- Trump’s election victory drove US stocks to record highs and pushed the dollar to a two-year peak. Meanwhile, international stocks are declining, with an MSCI gauge hitting a three-month low, nearing this year’s gains reversal. European stocks and the euro have also dropped. Fears of higher tariffs have shifted investor focus toward US assets, with fund managers’ US stock exposure at its highest since 2013, according to Bank of America. Since the election, US investment-grade corporate bonds’ risk measure has hit a low last seen in 1998, leading to a surge in fixed-income investments.
- Economist and former Clinton-era Treasury Secretary Larry Summers has warned that the potential impact of Trump’s proposals to slash taxes, spike tariffs, deport undocumented workers, and influence the Fed could result in higher inflation. “If he carries through on what he said during his campaign, there will be an inflation shock significantly greater than the one the country suffered in 2021,” Summers told Kate Bolduan on CNN News Central on Wednesday.
- Trump has won a Republican Trifecta with the Republicans holding onto their narrow House majority, giving him and his party unified control of the elected branches of government and limiting potential curbs on the incoming president’s power. This sharply diminishes any hope for Democrats to curtail Trump’s sway over next year’s big fights over trillions of dollars in expiring tax provisions.
- The world’s richest person, Elon Musk, will be taking on an official role to try to help Trump make government more efficient in an advisory capacity. Musk and former Republican presidential candidate Vivek Ramaswamy will lead a newly created department of government efficiency. The department seeks to dismantle government bureaucracy, slash excess regulations, cut wasteful expenditures, and restructure Federal agencies. Musk, Tesla’s largest individual shareholder, is currently $55 billion richer than he was on election day, according to Bloomberg’s Billionaires Index.
- The US budget deficit widened further at the start of the fiscal year, driven primarily by higher spending on health and defence as a surge in debt-interest costs slowed. The gap for October was $121 billion after adjusting for calendar differences, Treasury department data released on Wednesday showed. This is an increase of 89% year-on-year, though only 22% higher after accounting for distortions from an influx of deferred tax revenue in 2023. The figures illustrate a monumental challenge for those promising to rein in US debt.
- US inflation moved higher last month for the first time since March, as expected, but economists say the underlying trend remains favourable for another round of interest rate cuts. Consumer prices rose 0.2% last month and were up 2.6% from the year before, according to the latest Consumer Price Index data released on Wednesday by the Bureau of Labor Statistics. The so-called core consumer price index, which excludes food and energy costs and is the Fed’s preferred measure, increased 0.3% for a third month. It was up 2.7% from a year earlier. Overall inflation was 2.1%, the lowest since early 2021 and just above the central bank’s 2% goal.
- BlackRock’s spot-Bitcoin exchange-traded fund surpassed the size of its gold fund amid record demand for ETFs that invest in the original cryptocurrency. Trump has pledged to create a friendly regulatory framework for crypto, set up a strategic Bitcoin stockpile, and make the US the global hub for the industry. The price of Bitcoin has shot up by more than 25% since election day and was trading at $89,097 this morning.
- China’s trade surplus could hit a fresh record this year and is set to reach almost $1 trillion if it continues to widen at the same pace as it has in the year to date, according to Bloomberg calculations. This could set it on a collision course with some of the world’s biggest economies by aggravating an imbalance in global commerce that risks provoking President-elect Donald Trump. The goods trade surplus soared to $785 billion in the first 10 months, according to data released last week, the highest on record for that period and an increase of almost 16% from 2023.
- SoftBank Group is set to be the first to build a supercomputer using Nvidia’s new Blackwell-designed chips, signaling its ambitions in AI. Through its telecom unit, SoftBank aims to develop Japan’s most powerful AI supercomputer to support various local services. This system will use Nvidia’s DGX B200, which combines processors with AI accelerator chips, with plans for a future upgrade featuring the more advanced Grace Blackwell model.
- Prosus has reported gains of over $2 billion from its investment in Swiggy, emphasising the strength of its holdings outside its Tencent stake. Together with Naspers, its parent company, Prosus invested $1.3 billion to acquire a 31% stake in Swiggy. Ahead of Swiggy’s upcoming IPO in India on Wednesday, Prosus sold shares valued at more than $500 million. The food delivery company is pursuing an IPO valuation of up to $11.3 billion. Prosus will reduce its shareholding through the IPO, retaining a 25% interest in Swiggy, mirroring its approach with Tencent. The transaction is projected to yield returns of over $500 million for Prosus.
- As at Thursday’s close the S&P 500 was down 0.3% for the week.
Local News
- Writing for BusinessLIVE, editor-in-chief, Peter Bruce, believes that the potential (but unlikely in Dynasty’s view), exclusion of South Africa from the African Growth and Opportunity Act (AGOA) would have a relatively limited economic impact, as only 10% of our exports go to the US. However, the greater concern lies in the signals sent by Trump’s early appointments, which include individuals with hardline stances on South Africa’s foreign policy and global alignments. Key figures like Elise Stefanik as ambassador to the UN, Senator Marco Rubio as Secretary of State, and Michael Waltz as national security advisor, along with others in Trump’s administration, have openly criticised South Africa’s ties with nations like China, Russia, and Iran, as well as its stance on Israel. These appointments reflect an aggressive posture that is likely to create significant diplomatic challenges for South Africa, as Trump’s administration pursues policies sharply at odds with Pretoria’s positions. This shift suggests a more contentious period ahead in US-South Africa relations, extending far beyond trade.
- Ahead of S&P Global results of its latest review on South Africa’s sovereign rating today, credit analysts feel that the country won’t be able to shed its subinvestment or junk credit rating for years to come despite investor optimism about the economic trajectory under the Government of National Unity. Although the new administration is making progress, fiscal risks remain. It will be a while before economists can gauge the new government’s success at growth.
- On the positive side, South Africa’s official unemployment rate has decreased by 1.4 percentage points to 32.1% in the third quarter of 2024, down from a two-year high of 33.5% in the second quarter. Statistics South Africa figures released on Tuesday showed an increase of 294,000 in the number of employed people to 16.9 million in the three months to September, while there was a decrease of 373,000 in the number of unemployed citizens to 8 million during the same period.
- Electricity Minister Kgosientsho Ramokgopa intervened to stop Eskom’s threat of ceasing to supply electricity to the City of Johannesburg over unpaid debt and a steep current account. City Power has agreed to pay a portion of the R4.9 billion it owes Eskom. Last Friday, Eskom said it had served a notice of intention to suspend supply to the city because of City Power’s R4.9 billion arrears account. The city’s current account stood at R1.4 billion, Eskom said, and that was payable at the end of November. In a strongly worded rebuke on the same day, the city issued a statement saying that it was in a dispute with the national power utility for overbilling of more than R3.4 billion.
- National Treasury has put forward a proposal to distinguish hedge funds from other collective investment schemes, saying the R120 billion industry needs to be given room to grow. Should the proposal be passed into law, hedge funds will no longer fall under the tax definition of collective investment schemes.
- Life Healthcare, South Africa’s second-largest private hospital group, anticipates a substantial earnings boost for the financial year to September, it said in a trading update on Monday. Investors can look forward to the annual results set for release on 26 November showing headline earnings per share from both continuing and discontinued operations that are expected to rise between 69.4% and 77.3%.
- Boxer, which is about to be spun out from Pick n Pay through a JSE listing, aims to open more than 500 new stores over the next seven years, a move strategically designed to increase its market share. The Pick n Pay discount chain operates 500 stores nationwide comprising 308 Superstores, 162 Liquor Stores, and 30 Build Stores. Its plans are expected to create a substantial number of jobs.
- Investment holding company Brait reversed losses in the six months to September after the group completed its recapitalisation plan and reported strong operational performances at Virgin Active and Premier. It reported a comprehensive profit of R724 million in the interim period, after a loss of R300 million a year ago. Headline earnings per share rose to 39c from 1c a year ago.
- As at the time of writing, the rand was 3.2% weaker against the dollar and the ALSI was 1.3% down for the week.
Sources: Dynasty, Moneyweb, Bloomberg, Moneyweb, Business Report, BusinessLIVE, CNN, AFP, Reuters, M&G, NYT, etc.
