Published: September 4th, 2024
The South African Rand reached a twelve-month high of 17.8 against the US Dollar on Monday, with analysts at Commerzbank saying there is more going on with ZAR than just the wholesale selloff of the Greenback that’s occurred in recent days. In fact, while USD/ZAR was scaling new heights, the Dollar had also been recovering against bigger G10 peers, as evidenced by the exchange rates for EUR/USD and GBP/USD. In a market analysis published this week, Commerzbank’s forex strategy unit said the Rand’s outperformance was being influenced by local factors.
The bank’s analysts wrote that this week's high against USD was down to better-than-anticipated producer prices, which fell to an annualized rate of 4.1 per cent in July, down from 4.5 per cent in June.
‘On average, we were expecting a drop to 4.4 per cent. This marks another upbeat signal for the South African Reserve Bank, which could provide the leeway to cut interest rates in the Autumn, perhaps as early as this month.’
Normally, a looming interest rate cut would weigh on a fiat currency. But there are scenarios where it can be supportive, which Commerzbank says is now the case with ZAR.
'Rate cuts are typically associated with a softening currency. However, South Africa’s disinflation isn’t being caused by a weakening of demand. Rather it's because of structural improvements on the supply side’.
Analysts noted that the country seems now to be free of the power rationing that occurred in the first half of the year, marking a period of stability for essential infrastructure.
‘Disinflation is therefore opening the door for interest rate cuts, which could spur more investment and continued structural improvements.’
Taken together these developments lower the risk premium that FX traders had placed on South Africa in recent years, giving the Rand a boost.
In February, forex traders were weighing their ZAR bets on worries that a coalition government might form after the country’s national elections.
Polls suggested that a coalition government was in the offing, which might have kicked off a period of political uncertainty. Unsettled traders cooled on the Rand as a result, leaving ZAR undervalued.
A report from Investec, the South African investment and commercial banking firm, said speculation about potential outcomes and no clear lead for any political in recent polling, had been broadly negative for the Rand.
‘A sense of coming political turmoil has grown steadily this year in advance of the national elections, as the major parties aim to fire up their respective voter bases for support,’ says the report. 'Polls have differed widely, with swings for and then against each party as election day inches closer.’
Macro drivers were also impacting ZAR’s prospects. Compared to other emerging market currencies, Rand had struggled in the early months of 2024 against headwinds caused by dimming expectations for interest rate cuts by the US Fed. The knock-on effects of recent Fed policy signals suggest that the cost of money around the world won't fall as quickly as consensus had expected.
This hindered the potential for global economic growth, and growth-sensitive currencies like ZAR felt the pinch first.
While big picture issues were influencing performance, Investec said the Rand's undervaluation was also being driven by domestic factors and worries that smaller left-wing parties could distract any future government’s policy objectives away from market-friendly fundamentals.
This growing uncertainty had chilled demand for the country’s currency.
‘Political instability is having a predictably negative effect, with support for the ruling ANC in steady decline and a new political landscape emerging.’ Uncertainty about what the future composition of government will be is having a chilling effect on forex traders.
In November 2022, Rand was one of the G20 grouping’s worst performers while G10 major Sterling was near the top. The divergence drove a 12 per cent rally for GBP/ZAR from lows seen in late September of that year, erasing most of 2022’s earlier losses for the pair.
The period of underperformance for Rand happened during another strong month for the US Dollar and a period of abnormal weakness for China's Renminbi. Rand’s descent may have also been aggravated by domestic data that showed manufacturing to be the only sector bright spot in an otherwise slowing South African economy.
Analysts said the real drivers behind GBP/ZAR price action were Sterling recovery and Dollar rally, both of which had stalled.
An analyst note from RBC Capital Markets said that GBP/ZAR typically correlates to USD/ZAR, meaning it would normally benefit if the latter hit new highs. The Dollar outlook for the remainder of 2022 hinged on how investors interpreted announcements coming put of year-end meetings of the US Federal Reserve.
‘Without updated forecasts for guidance, the Fed’s comment on the economy (will) likely to be nuanced, with investors looking for signals that a more dovish approach to rates is in the offing. That sort of scenario could give USD/ZAR space for relief, and an environment conducive to long positions.’
While USD exchange rates had been on the rise for much of 2022, speculation in late October about a potentially 'dovish' turn in Fed policy led to widespread dollar selling. A resurgence in USD selling over the coming days left GBP/ZAR ‘teetering on the edge,’ RBC said.
While ZAR fell back in late 2022, at mid-year it was on the rise. Rosier-than-expected economic data released in June 2022 saw the Rand notch up significant gains over most of its emerging market peers, returning it to positive territory and even briefly topping the G20 league table.
In a note to investors, Investec wrote that 'the upbeat GDP figures for the first quarter of 2022 have piled on more pressure for higher South African interest rates. A 50 basis-points hike at the SARB’s July policy meeting appears more likely now than a 25 basis-points rise’.
