The rand, one of the most resilient emerging market currencies in the wake of Russia’s invasion of Ukraine, could extend its gains further as improved domestic metrics reinforce the support it is getting from higher commodity prices, analysts say.
Fresh from its best quarter since the end of 2020, the currency could gain another 3.4% this week, according to Investec economist. They said the rand may trade as firm as R14.10/$ this week, a level it has not reached since September 10 2021 when it became the best performing emerging market currency of that year as the current account surplus reached its highest level on record in the second quarter. But the currency could also easily weaken to R15.10/$, Investec said.
“The rand has shown reduced volatility this year in comparison to other emerging market currencies, and this is also likely reflective of its somewhat reduced credit risk as markets perceive a lower risk of default, with SA on a stable outlook from Moody’s,” Investec economists said.
“SA has seen a recent halt in the downward migration through the credit rating ladder, signalled by both Fitch and Moody’s in their removal of the negative outlooks they had on SA’s credit ratings when they last downgraded them in 2021.
“The heavy-handed approach in 2020 of the command council’s response to Covid-19 unnecessarily damaged the economy,” they said.
The local currency has shown much resilience in the face of high volatility in the global financial markets, benefiting as the war in Ukraine boosted the price of metals that SA exports, such as platinum. Russia is also a major source of commodities, meaning that the country has emerged as a potential substitute supplier. That has helped the rand hold its gains and stay below R15/$ for the past three weeks.
The rand was supported when the prospects of faster inflation prompted the Reserve Bank to raise interest rates at each of its past three meetings, with some economists saying the next move, which could come as early as the next meeting in May, could be 50 basis points. That will help maintain the advantage of holding local assets such as SA bonds, which are offering the highest yields, even for emerging markets.
At 7.30pm on Monday the rand had strengthened 0.44% to R14.59/$, bringing its gains to about 9.4% so far this year. It had firmed 1.23% to R16.15.99/€ and 0.43% to R19.11/£. The euro was 0.69% weaker at $1.0971.
Its 2022 gains against the dollar may help cushion the country from the inflationary effect of elevated oil prices, which have risen more than 36% so far this year, with about seven percentage points of that since Russia launched its assault on neighbouring Ukraine.
Bonds firmed on Monday with the yield on the R2030, which moves inversely to the price, falling four basis points to 9.55%. It increased to more than 10.30% in the wake of the Ukraine invasion.
Sentiment towards SA assets got another boost on Friday with Moody’s Investors Service saying it had upgraded the outlook for the country’s debt from negative to stable, citing the impact of surging commodity prices, which saw the SA Revenue Service beat its 2021/2022 tax collection target by almost R200bn, and the government’s success in containing growth in spending.
“Our currency and bond markets are one of the most liquid markets in the world,” said James Turp, head of fixed income at Absa. “Although we bear the brunt of being the proxy of risk for emerging markets (when there is risk — people may sell the rand more), our financial system remains attractive compared to other emerging market currencies.”
An improving economy will combine with SA’s trade position to put the brakes on further downgrades, Turp said.
“We are seeing a sustained normalised outlook — as some major leading economic indicators have been positive so far, and we remain stable. Investors are seeing that.”
However, the rand will need to break through the R14.41/$ last seen in September to reach a key level of 14.25/$, RMB head of forex execution Matete Thulare said. “We need a lot of good news on the global environment to boost sentiment to see a risk rally,” he said.
TreasuryONE currency strategist Andre Cilliers sees the rand following a similar path: “The recent R14.40/$ to R14.80 /$ range is likely to hold for now as developments between Russia and Ukraine continue to unfold.”
Brent crude was last seen up 1.85% at $106.22 a barrel. It reached a record high of $147.47 just before the bursting of the subprime bubble, which led to the 2008/2009 financial crisis.
At the same time, the platinum price was flat at $988/oz, while gold had risen 0.24% to $1,929.60. Gold hit its highest 2022 level on March 8, at $2,069/oz.
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