Where next for the rand? | Fin24
 
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Where next for the rand?

Aug 24 2016 11:39

Since December 2015’s brutal depreciation of the rand following the surprise shift in finance ministers (dubbed “Nenegate”), the rand has been on a steady path to recovery in 2016, the extent of which has caught many (including myself) by surprise.

However, Tuesday’s (23 August) news that finance minister Pravin Gordhan might be facing a possible arrest by the Hawks (Directorate for Priority Crime Investigation), as well as a new forensic investigation relating to his tenure at the South Africa Revenue Service (Sars) has provided a domestic catalyst for renewed short-term weakness for the rand.

Ironically (or coincidently), the below chart snapshot taken on Monday showed a forewarning that the rand (in dollar terms), at then current levels had formed a “w” shaped reversal pattern. The pattern (in the below context) suggests a short-term change in directional trend from that of strength to one of weakening.

This can be observed in the graph below: 



But where is the rand headed?

A number of external global factors have been causing developed-market currency weakness and in turn emerging-market currency strength. Major economies around the world have continued to roll out and – in many cases – extended monetary easing programmes, trying to stimulate inflation and economic growth. 

While the US Federal Reserve Bank has commenced with the monetary tightening cycle, the process of raising interest rates has been paused for the time being, leaving lending rates at very accommodative levels as the global marketplace remains in a fragile economic state. In the EU and the UK, uncertainty pertaining to the Brexit scenario has further weighed on the countries’ respective currencies as well. 

In South Africa, domestic factors for rand strength have been a moderate increase in interest rates and the short term aversion of a sub-investment ratings downgrade from ratings agencies Fitch and Standards and Poor’s. In the last few months improved trade balance data and a successful election process would have further helped the rand by improving investor sentiment and aiding the attraction of foreign direct investment.

While emerging-market currencies in general were strong over this period, the rand’s outperformance of its peers (pre-Nenegate), had paid tribute to the aforementioned catalysts. The relatively high interest rate environment in SA, when compared with that of developed markets, has also helped induce carry trade demand, with investors search for an increased yield opportunity.

While accommodative monetary policy looks set to remain and possibly extended across major world economies, it might be argued that external risks to catalyse rand weakness may be diminished in the near term. Against the dollar, however, this might not be the case. This is because the probability of a rate hike in the US is starting to appear more likely as Fed officials have been more hawkish in their comments relating to this as of late. 

A look at a longer term chart (September 2013 to present) of the rand against the dollar shows a clear trend of weakening for the domestic currency. The strength we have seen this in the shorter term (January 2016 to present) almost feels like the normalisation of the currency after it had capitulated short term weakness in December last year. 



However, the current investigations into the affairs of the Minister Gordhan are unlikely to find short-term resolve (as has been the nature of these types of event in the past). The end of the year also sees international ratings agencies reviewing SA’s sovereign debt rating once again; and with economic growth now expected at 0% for the year, combined with political turmoil, a downgrade (or two) becomes a very real probability. 

With these factors in mind, the risks to the rand might be skewed in favour of the long-term weakening trend. For now, it is more likely that the rand will reach R15/$ in the short term than retesting the R13/$ level. 

Shaun Murison is a market analyst at IG.

rand  |  dollar  |  pravin ­gordhan
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