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Why the rand will continue to appreciate

DESPITE the hawkish and “careless” appearance of President Jacob Zuma as well as the ANC against the Constitutional Court verdict that he and Parliament have contravened the constitution over the Public Protector’s Nkandla report, the verdict itself as well as domestic and global economic prospects will favour the movement in the rand in weeks to come.

The jobs report in the US released on Friday, the financial market stability in Japan and Europe that has receded and domestic economic data support the sentiment of a stronger rand in the short to medium term.

The gradual approach of “possible interest rates increases" in the US was supported by the latest employment data which showed that although more jobs were created (215 000 in March), the unemployment rate increased from 4.9% in February to 5.0%, as more discouraged US workers enters the job market looking for opportunities. This in return keeps the average hourly earnings lower than expected.

In March, average hourly earnings for all employees on private non-farm payrolls increased by 7 cents to $25.43, following a 2c decline in February. Over the year, average hourly earnings have risen by a modest 2.3%. It is expected that this will put less pressure on the domestic inflation rate as: “Personal income increased $23.7bn, or 0.2%, and disposable personal income (DPI) increased $23.7bn, or 0.2%, in February,” according to the US Bureau of Economic Analysis. These are lower than the 0.5% and 0.4% respective increases during January 2016.

The Bureau also reported that: “Wages and salaries decreased $9.4bn in February, in contrast to an increase of $46.5bn in January. Private wages and salaries decreased $12.9bn, in contrast to an increase of $41.9bn during January.”

This data underlines the Fed’s latest forecast that inflation in the US will reach 1.7% in 2016, lower than the 2.0% target necessary for interest rate hikes. This will likely lead to the Fed abstaining from increasing rates before the second half of the year, causing emerging market currencies (also the rand) to appreciate further.

European stocks rose for the first time in three days today (4 April 2016) on confidence that the stronger US economy and better financial stability in Europe and Asia will help global growth.

Positive local developments

Domestically the SA Revenue Service has collected R1.0699 trillion in taxes during the 2015/16 year. This is R154.07m more than the target set out in this year’s Budget Speech by Finance Minister Pravin Gordhan.

This is the first time that SARS collected more than a trillion rand and is remarkable given the lack of economic growth in South Africa. This increase in tax revenue may lead to a lower central government debt to GDP than budgeted for (3.6%). In this regard, the sentiment from foreign grading agencies and investors towards the country will have a positive effect on the rand exchange rate.

A second real economic development engages around the trade account. South Africa's trade deficit decreased sharply to R1.07bn in February of 2016 compared with an upwardly revised R17.96bn deficit recorded in January 2016. Of interest is that exports rose 27.7%, as sales of vehicles and transport equipment rose sharply. Against this sharp increase imports have grown by only 2.7%, mainly due to higher purchases of vegetable products.

For the year to date the trade deficit has decreased by 38.5% to R19.03bn. This is only 61.4% of the R30.96bn the previous year.  

The above more positive global sentiment, together with better domestic economic prospects, is likely to impose an appreciative effect on the rand over the next few months.

Together with more positive political sentiment that the South African Parliament will be able to deal with the current constitution matters and corruption, prospects for a downgrading to junk status are likely to dwindle. This in itself will contribute to a stronger and more stable currency in months to come.

* Dr  Chris Harmse is the chief economist of Rebalance Fund Managers, and economic advisor of Kalére Group.

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