Published: December 8th, 2022
The Pound to Rand rate fell back further this week from one-year highs and looked ready to test the waters below the 21.0 mark. Global market drivers and events in America could decide just how low GBPZAR will go before year’s end. Rand was a G20 outperformer when the week began as the Greenback softened and a GDP print from Statistics South Africa said the country’s economy had grown by 1.5 per cent in the third quarter, for an annualised growth rate of more than four per cent.
In a review of the data, Economists at Investec wrote that ‘modest declines in important crop harvests like corn; trade friction in vegetables, beef and wool; production issues in the sugar industry; plus an outbreak of foot-and-mouth disease could mitigate against ZAR’s full-year performance.’
The country’s mining sector also looks susceptible to slowing global growth, Investec added, which will impact demand for South African exports. Last quarter's performance was much stronger than consensus but also partly down to the severe flooding that lowered output in Q2.
The Rand's bullish start to this week’s session has also reversed the sharp sell-off that began last week amid the political turmoil around President Cyril Ramaphosa.
Ramaphosa has faced calls for resignation over the government’s handling of the floods, in which many people died. He told reporters that he won't resign, and in fact plans to run for third term as president. Analysts expect that will put the ZAR in a stronger position this week since Ramaphosa has business and investor support, plus a dearth of suitable candidates with enough support to challenge him.
While the economic uptick will be supportive of the Rand, ZAR has also had a boost from favourable declines across the US Dollar exchange rate complex, as well as the softening seen recently in US government bond yields.
ZAR made a strong showing in the opening months of the year, though by the end of Q1 analysts were warning support could fade in the coming months.
Analysts at Nedbank wrote in March that ZAR was benefitting from rising global commodity prices mixed with a stable domestic economy. Those two forces combined to offer global investors notable returns but rising oil prices were already putting the Rand under pressure.
‘Over the past two years, Rand has benefitted from a large trade and current account surplus. We believe that is likely to dissipate and even reverse in the coming months.’
ZAR had appreciated in value by 6.8 per cent for the year-to-date on a trade weighted basis against the fiats of its most important trading partners.
Those gains surprised some investors given that ZAR is one of the most sensitive 'high beta' currencies that normally depreciate in times of rising geopolitical anxiety. Investors have been understandably spooked by Russia's invasion of Ukraine, yet ZAR has found support thanks to South Africa’s reliance on exports of commodities and raw materials.
Nedbank wrote that the Rand is benefitting from the surge in metal prices caused by worries about supply on the back of sanctions on Russian commodity exports.
The New Zealand (NZD) and Australian (AUD) dollars have also benefitted. Like ZAR, they tend to depreciate in times of global investor anxiety. All three are nonetheless finding support amongst the current set of circumstances peculiar to the Russian 'special operation’ in Ukraine.
The Rand got an extra shot of resilience from steady growth in the South African economy. Forex traders will be watching this week to see if a similar scenario plays out for GBPZAR.
The Institute of International Finance (IIF) said in March that Portfolio flows to Emerging Economies showed that foreign investors were selling most of their emerging market positions, with the exception of South Africa, where equity markets saw an inflow of outside money.
In its monthly report the IIF said that South Africa was giving investors looking for emerging markets exposure a combined package of relative macroeconomic stability compared to Russia, Ukraine, Russia, Turkey, or Brazil, plus deep financial markets, and cheap market valuations.
Central bank policy also supported ZAR, with the South African Reserve Bank (SARB) raising interest rates and increasing returns on assets like Rand-backed bonds.
In January, SARB raised the interest rate for a second time, taking it to four per cent. However, money markets are currently pricing in another 200 basis points worth of increases for the rest of 2022.
The IIF said those expectations might be too aggressive, with a chance that many will suffer losses if fewer hikes than expected were actually delivered.
That’s one of the downside risks analysts were flagging for the Rand across 2022. Another was fragile global risk appetite. As investors adjusted portfolios in response to a mix of issues that include Ukraine, inflation, supply chain bottlenecks, and rising interest rates, the worry was that some would seek safety elsewhere.
'The ongoing battle in Ukraine and the disruptions that Russian sanctions are creating in global commodity markets will likely increase risk-off sentiment,’ said Nedbank’s Forex Strategy Unit in an analyst note. ‘That muddies the outlook for global growth. The steep rate-raising path indicated by the US Fed will also test risk appetites through the remainder of 2022’.
Nedbank also said that South Africa's export prices might be more resilient than expected if rising risk-off sentiment pushes investors into safe-haven investments like precious metals, where the country also enjoys large exports.
On the downside, South Africa is a net energy importer and the upward spike of crude oil prices could chip away at its export advantages.
Nedbank says crude oil and refined petroleum amount to nearly 17 per cent of South Africa’s total imports. The country can also expect to feel the pinch of higher energy prices and rising inflation on capital goods due to supply chain problems.
'For that reason, we see import prices rising at a faster pace than those of exports. That will have a negative impact on South Africa's trade balance’.