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Rand shocks markets, regains third of losses since Gordhan recall

Apr 13 2017 10:20
Matthew le Cordeur

Cape Town – The rand rallied by 2.7% on Wednesday gaining 40c against the dollar, surprising currency analysts in South Africa and regaining almost a third of its losses since former finance minister Pravin Gordhan was recalled from the UK and then fired.

“It is quite a strange feeling in the market this morning, with the rand having its best day in six months yesterday,” said TreasuryOne dealer Andre Botha on Thursday.

“Breakout,” exclaimed Rand Merchant Bank analyst John Cairns on Thursday.

“I would like to say that the march in Pretoria and comments by (Finance Minister Malusi) Gigaba were the cause of the rand strength, but that is simply not the case,” said Umkhulu Consulting’s Adam Phillips.

“The move might surprise many, but throughout the last two weeks the rand moves have been orderly and what has happened just proves that positions need to be flexible as international news can affect the currency just as much as local events,” he said.

Most of the strength comes from rand outperformance

In the respective morning notes, the analysts explained that about 0.5% of the sharp move was attributed to comments US President Donald Trump made about the dollar getting “too strong” and that the Federal Reserve should keep interest rates low.

Cairns said the other 0.5% can be attributed to generalised risk gains, while the rest (1.7%) is the rand’s outperformance.

“The bulk … is a bit of a mystery as the usual suspects for rand strength such as portfolio inflows were hardly inspiring,” explained Botha.

“This leaves us in a bit of a conundrum,” he said. “Was the strength due to the fact that some key technical levels were breached and there was a run on stop losses or is there something in the background that we haven't factored in as of yet.”

“It will be interesting to see whether this was just an anomaly or we are seeing the rand edging lower. Looking at the facts there seems no reason for the rand to have strengthened by the percentage that it did.”

Graph: Rand vs dollar daily moves from 1 January to 13 April

Rand regains a third of lost ground since GordhanGate

Cairns said the rand has now unwound almost one third of its losses after President Jacob Zuma recalled Gordhan from the UK on 27 March and fired him on 30 March. This then triggered a ratings downgrade to non-investment grade by Standard & Poor’s and Fitch last week.

“USD/ZAR rose around R1.50 and has reversed 50 cents,” said Cairns. “Total rand losses of a mere R1 seem remarkably limited given all that has happened. Foreign capital inflows yesterday were only moderate but remain the key backing to this resilience.

“Rand gains have come despite sovereign risk indicators remaining unchanged at elevated levels.

“The South Africa five-year CDS (credit default swap) spread is at 219 this morning, only a tick off its record high. It is possible that the CDS and other risk indicators are merely lagging — they should move in lock step with the rand but have lower liquidity — but for now there is something seriously misaligned between the rand and these instruments.”

“Local news flow does not justify gains. Headline news is about President Zuma’s insistence he is staying. Minister Gigaba continues to say all the right things — nuclear only if it is affordable, keeping the spending ceiling, cannot accommodate high wage demands — but the market has heard this before and remains sceptical.”

As Botha published his note saying the rand might be overstretched, with “a bounce up to the R13.50s”, the rand did just that. By 09:50, it shot back up to R13.50 to the greenback.

“Exporters will lurk above R13.50/$, especially as the no-confidence vote has been postponed until the Con Court rules on a secret ballot (for the Parliamentary vote of no confidence into Zuma),” said Phillips.

Graph: Rand vs dollar intraday moves from 12 April to 13 April


Source: Bloomberg

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pravin gordhan  |  dollar  |  junk status  |  currencies  |  equities  |  rand

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