Thu, 24 Jun 2021

  • The strong rand has outperformed its emerging-market peers since the height of the pandemic.
  • The rally may not be over yet thanks to booming commodity prices and the global search for yield.
  • Also, foreigners are buying SA bonds again - which will support the currency

The rand's 30% gain against the dollar since the height of the pandemic has outstripped emerging-market peers - and the rally may not be over yet.

South Africa's currency has recovered all its losses since it slumped to a record in April last year, and then some. Strong commodity prices and the global search for yield should support the narrative for further gains in coming months. Domestic fiscal metrics - though still far from healthy - are improving along with terms of trade, while the government's crackdown on corruption is also fueling positive sentiment.

On Tuesday morning, it was trading at around R14.05/$ - after dipping to below R14/$ on Monday, its best level in 16 months.

It's becoming easier to back the rand, and here's why:

Foreigners are returning to South Africa's bond market

After record outflows from South Africa's bond market in the first four months of the year, last week's disappointing U.S. jobs numbers heralded a reprieve. Foreign investors bought a net R5.2 billion of South African government debt on Friday, the biggest in inflow since November, as the move lower in Treasury rates gave new impetus to the search for yield. Together with a healthy trade surplus fueled by rising commodity prices, those inflows could be rand-supportive in coming months.

Given dollar tested breakout point and failed, rand is ripe for more gains

The dollar last week tested a pivotal area at 14.40-14.50 after consolidating in the second half of April. Failure to breach resistance meant that rand bulls got the upper hand once again, as shown by the fear-greed indicator, and the pair fell to fresh cycle lows. In the longer-term, the rand seems to be in the final stages of the ABC correction of an Elliot Wave Cycle that started in 2011 and was completed in early 2020. The dollar may weaken toward the 11.50 handle, according to the pattern.

Rand bearish sentiment takes a hit this month and bias may persist

Demand for dollar topside exposure took a hit as key resistance around 14.50 held. While greenback calls still trade at a significant premium, bearish sentiment for the South African currency, as measured by one-month risk reversals, has moved to the lowest level in three weeks, with room to extend toward February range extremes.

Positive correlation shows boost to rand from commodity prices

The correlation between the Bloomberg Industrial Metals Sub-Index and the rand has strengthened to 0.6, near its strongest level this year. Industrial metals account for about a quarter of South Africa's export earnings, bolstering the current-account balance, for long the rand's Achilles heel. The current account may be in surplus this year, according to the median forecast in a Bloomberg survey.

Rand basis swaps remain well above long-term average

The large inflows from loans South Africa procured from the International Monetary Fund and New Development Bank amid the height of the Covid-19 pandemic have created a surplus of dollars in the local banking system. That's lifted USDZAR basis swaps well above the long-term average, making it expensive to short the South African currency. With more inflows expected this year from a World Bank loan and Eurobond issuance, the cost of betting against the rand will remain elevated for some time.

Get the biggest business stories emailed to you every weekday.

Go to the Fin24 front page.

Source: News24

More Latin America News

Access More

Sign up for Latin America News

a daily newsletter full of things to discuss over drinks.and the great thing is that it's on the house!