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Rand at its best level in four months, but real risks remain

Dec 19 2019 14:28
Lameez Omarjee

The rand on Wednesday broke below R14.30/$, translating to its strongest performance in four months, according to analysts.

While the local unit usually strengthens over December, there are additional driving forces behind its recent rally, said Bianca Botes, Treasury Partner at Peregrine Treasury Solutions.

In an emailed response to questions from Fin24, she explained that the rand had been bolstered by phase one of a trade deal being reached between the US and China. Furthermore, trade volumes in the market are thin, which means any demand for the rand would drive the currency stronger.

There are also carry trade inflows due to the attractive yield the rand is offering compared to its peers. A carry trade is a strategy that involves borrowing at a low interest rate and investing in an asset that provides a higher rate of return.

Analysts from NKC Economics said the local currency is being supported by "risk appetite" and "carry appeal", according to economist Jee-A van der Linde.

"Moreover, Fitch's decision not to downgrade the country's credit rating further provided added support," Van der Linde commented.

National Treasury on Wednesday issued a statement confirming that ratings agency Fitch maintained its junk status rating of BB+ for long-term foreign and local currency debt, with a negative outlook.

Botes explained that the rand did not weaken on Fitch's decision as "the [trade] volume is currently really thin and any purchase of (the rand) drives it stronger at the moment, causing an exaggerated positive move in the local unit. Markets also didn't expect a different outcome, given the current state of SA's woes," Botes said.

Further ashore, the US House of Representatives voted in favour of impeaching President Donald Trump. The rand didn't move on developments in the US. Botes said that initially, when news of Trump's impeachment reached the markets a few months ago – it had an impact and resulted in the rand strengthening.

"Trump is extremely likely to remain in office as the Senate is likely to acquit him, and it will just be more of the same from Trump," Botes said.

Will the rally continue?

When asked if the rand would continue to strengthen over the festive period, Botes said there is "some potential" for the rand to "gain even more ground".

"However, we also need to look at the reality of the global and economic backdrop and ask ourselves if this rally is sustainable in the longer term. The short answer to that question is 'No'. Real risks still litter the market place," she cautioned.

Some of the risks to the rand include load shedding - which is expected to continue after Christmas and would result in the SA economy coming under more pressure.

There is also a global slowdown expected, which will have a negative impact on all economies, including SA. The country is also a long way from resolving its current fiscal burden and the dire state of state-owned enterprises, Botes added.

"February will see the budget speech, which is sure to deliver even more bad news. There is a rating review in March which will depend on the prevailing economic situation as well as the budget outcomes," Botes said.

The rand opened at R14.30/$ on Thursday morning, and strengthened to R14.27. By 13:21 it was trading 0.30% weaker to the previous close at R14.34.

NKC Economics expects the currency's trade to range between R14.20/$ to R14.45/$.

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