The rand hit a nine-month high in May amid investor optimism that the ANC will retain its majority and potentially form coalitions with market-friendly smaller parties.
As the country gears up for Wednesday’s much-anticipated general election, polls show the ANC receiving less than 50% of the national vote.
The rand firmed to R18.03/$ last week — its best level since August 1. It has strengthened more than 1.6% in May and is on track for its best month since December.
“The rand has been outperforming a number of its Brics and commodity-based currency peers [amid] suggestions that recent polling data has calmed investors, who may now be seeing some value in the local currency, SA Inc stocks and the local bond market,” said IG senior market analyst Shaun Murison.
Annabel Bishop, chief economist at Investec, said investor concerns had been allayed by “expectations of an ANC coalition with the centrist IFP instead of the extreme left-wing EFF”.
However, if “the ANC does decide on a national coalition with the EFF [it] would then result in very severe rand weakness, negatively affecting inflation”, said Bishop.
Improved global sentiment has supported risk assets such as the rand, along with other local assets, after recent data showed weakness starting to creep into the US’s robust jobs market and inflation numbers for April coming in softer than expected. This led investors to believe that the US Federal Reserve will begin cutting rates in the next few months. However, minutes from the recent federal open market committee meeting released on Wednesday indicated policymakers remained concerned about inflation, leading to the local currency giving up some of the recent gains as markets pushed back a possible cut in September to December.
“There is little doubt that the global environment has played a role, but the market’s positive mood vis-à-vis the rand seems to be due mostly to the optimism around a market-friendly election outcome,” said HSBC Global forex strategist Murat Toprak.
“A market-friendly ANC-DA coalition could improve checks and balances in policy decisions, particularly in fiscal spending. Against a backdrop of structural improvement via a contained fiscal deficit, and possibly a smaller current account deficit, cyclical drivers (better inflation-growth mix, attractive carry) could become more dominant for forex,” said Toprak, adding that in such a scenario “the rand’s strength against the dollar trend could extend”.
“However, given the uncertainties over the actual results and the willingness of the political parties to work together, we keep our cautious view on the rand,” said Toprak.
The positive sentiment has filtered through to other areas of the market, with the JSE all share touching 80,000 points last week for the first time since February 2023, while the yield on the R2030 government bond reaching as low as 10.27% during the week, after peaking at well over 12% during the early part of the pandemic in 2020. Bond yields move inversely to their price.
According to in-house research by RMB, there is a 50% probability that the ANC will obtain 45%-50% of the national vote and only a 10% probability that it will attain an outright majority.
The bank sees a 20% probability that the ANC forms a coalition with the EFF if it gets 40% or less; a 15% probability it forms a coalition with the DA if it gets 40% or less; and a 5% probability that the DA-led multiparty charter will oust the ANC from government.
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