Trump, Zuma and ratings reprieve boost rand

Cape Town – A mixture of a weakening dollar caused by Donald Trump’s future presidency, rating agency reviews in South Africa on Friday and a party meeting that could unseat President Jacob Zuma has seen the rand strengthen by almost 2% on Monday morning.

The rand, trading as low as R13.83 to the dollar at 10:20, had broken through the R14 ceiling earlier on Monday, amid a report by News24 that three cabinet ministers had called on Zuma to step down or that the ANC National Executive Committee (NEC) vote to remove him.

The main reason for the rand’s strength however was the result of the dollar weakening across the board.

“Late Friday and early Monday price action suggest that the election-related upside in the dollar and treasury yields is finally petering out,” said RMB analyst John Cairns in a note on Monday. “This has allowed some good rallies in emerging market and risk currencies, with the dollar dropping below R14 for the first time since the election.”

Bloomberg reported: “Trades that performed best in the three weeks since Trump’s shock election victory took a breather Monday, with the dollar falling the most since September and S&P 500 Index futures signalling US stocks will slip from all-time highs.”

The other factor strengthening the rand was the decision by Moody’s on Friday to keep its rating unchanged. However, Fitch changed the outlook on both the foreign and local long-term ratings from stable to negative, putting it one notch above junk status.

“This implies that the loss of local currency – and not just foreign currency – investment grade status is now possible, something that the market has probably been too complacent about,” said Cairns.

Cairns said the market should be cautious about expecting too much from the NEC Zuma vote, especially since it has “been disappointed so often in the past”.

Umkhulu Consulting analyst Adam Phillips agreed.

“Almost each week we think something is going to happen with Zuma,” he told Fin24 on Monday. “Whether he likes it or not, he is answerable to the NEC and the ANC. It sounds like they are having more than a meeting, more like a scrum.

“If Zuma stays he will have to reshuffle his cabinet, then it does not really matter what S&P decide on Friday night,” he said. “Anyone hoping for a quiet December on the currency front might need to think again.

“When one wraps politics and economics together one is going to get an uneven number, so anything could happen this week,” Phillips said. “We are not even sure what S&P will say on Friday.”

Cairns said the announcement of Standard and Poor's rating decision on Friday night will result in a bigger market reaction than that of Fitch and Moody’s, which he said “were mostly ignored”.

Citing the rand’s volatility, Phillips said the volumes being traded are very thin, with up to 30c swings on any given day.