Rand strengthens thanks to lockdown easing globally

The easing of lockdown regulations as some countries start to reopen their economies has provided a welcome boost to the rand. That, and the decision by ratings agency S&P last week to keep the country’s credit rating unchanged, according to analysts.

The local unit strengthened as much as 5.2{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} last week. It continued its rally opening at R17.57/$ on Monday morning, strengthening to as much as R17.53/$ before trading at R17.67 by late afternoon.

The rand has been the second-worst performing currency after the Brazilian Real, having weakened more than 20{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} for the year to date. Just weeks ago, analysts were predicting the currency would test the R20/$ mark, as they anticipated large capital outflows as much as $14 billion on the back of the rand falling out of the World Government Bond Index, due to Moody’s downgrading it to junk status. But this has not yet happened.  

On the contrary, appetite for SA portfolio assets has not died down, Investec chief economist Annabel Bishop noted in a rand report. She expects the rand to strengthen further this year, possibly to R16 against the greenback, and even further into 2021.

The week ahead will see markets keep an eye on rising trade tensions between US-China, as well as the outcomes of the Chinese National People’s Congress.

“We have got an interesting week ahead, the market will watch what happens with regard to lockdown easing around the world. Markets are slightly optimistic, there is no serious sign of a second wave [of Covid-19] infections. The more this continues, the more optimistic markets will get,” said RMB analyst Matete Thulare.

Global recovery

Bishop noted that economic activity in Germany and China was showing early signs of recovery. “With these two countries key importers of SA’s exports, the rand has also seen some benefit from rising sentiment as a commodity currency. Metals prices have lifted by 12.4{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} on the month, and by 3.0{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} y/y, also driving the domestic currency stronger.”

But Bishop warned early optimism on economic recovery, is also vulnerable market sentiment switching. “The recent support for the rand from this source will be at risk.”

On the domestic front, President Cyril Ramaphosa on Sunday announced that lockdown restrictions would shift from level four to level three, from 1 June. This would see more sectors becoming operational and as many as eight million people returning to work. This news has also been well received by markets.

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