At current levels, the Rand provides a good opportunity for externalising funds
The Rand exchange rate appears to be benefiting from a rare range of positives that are likely to continue over the next 3-6 months. Importantly, this does not mean that Rand is expected to strengthen substantially further in the weeks ahead, but it does appear that the current range of positive factors could help to keep the Rand around current levels for a number of months.
These positive factors include:
- A strong international commodity price performance, that has historically tended to support relative Rand strength. The higher commodity prices have also led to an uplift in South African mining revenue, which is providing much needed support to South Africa’s tax revenue.
- The next US fiscal stimulus package, which is estimated at $1.9 trillion, is highly likely to be approved and begin to be distributed within the next 4-6 weeks. This will provide the US economy with a further growth spurt, but also encourage further capital flows into emerging markets assets such as South African government bonds and domestic equities. This improvement in foreign portfolio investment should tend to support the Rand.
- Despite the concerns regarding the effectiveness of the AstraZenca vaccine, South Africa has made better progress during the first 6 weeks of 2021 in its efforts to acquire and distribute an appropriate COVID-19 vaccine. The fact that South Africa was willing to halt the distribution of the AstraZenca vaccine is being viewed as a brave and insightful decision within the medical community. Fortunately, the first batch of the more effective Johnson and Johnson vaccine should arrive next week. This progress in sourcing the vaccine has lifted confidence in South Africa’s economic recovery and is encouraging some additional foreign capital inflows.
In the context of the these positives, it is not envisaged that tonight’s State of the Nation will provide much further support, but is should at least make further encouraging noises.
Lastly, it is worth highlighting that emerging market currencies, on the whole, have benefited from many of the some positives; most especially the higher commodity prices and pending further fiscal stimulus in the US. Furthermore, it does appear that the current positive sentiment towards emerging markets it likely to be sustained given that global growth estimates are currently being revised higher, including an expectation that there will be a significant revival in global trade.
The key risk to this currency view over the next 3-6 months is that something significant changes, either locally or globally, regarding the spread of COVID-19 and/or the effectiveness of the vaccine, especially against the new variants of the virus. Unfortunately, this is not forecastable. Upcoming local events are unlikely to cause any large concern that isn’t already priced into the market, including the National Budget. In fact, there is the possibility of some upside surprise when the Minister of Finance presents the 2021/2022 National Budget this month.
In percentage terms, at current levels of the Rand provides a good opportunity for externalising funds. Any further rally may not be sustainable. Looking further-out beyond the next 6 months, there is a real risk that South Africa’s economic growth flounders yet again, or that tax receipts, once-again, fall substantially behind budget. This could result in a further credit rating downgrades and renewed currency weakness. At the same time international commodity prices are likely to peak during late 2021, and hence that benefit for the Rand might start to fade. In other words, the further out we look, the greater the risks to the Rand.
Source: Alison Barker, Economist & Head of Analytics Consulting FX Solutions