South African Rand Steadies Near Historic Lows but Is Not Out of Woods Yet

- GBP/ZAR retreats multi-year peak as USD/ZAR off record highs.

- ZAR steadies as market welcomes Gov's coronavirus aid package.

- As stock markets stabilise while oil prices head back toward zero.

- But ZAR still vulnerable until after month-end bond index exclusion.

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- GBP/ZAR spot rate at time of publication: 23.26
- Bank transfer rates (indicative): 22.45-22.61
- FX specialist rates (indicative): 22.92-23.05 >> More information

The Rand steadied near historic lows Wednesday as investors celebrated a fiscal suuport package worth a double-digit share of GDP amid more supportive global weather conditions, but the currency could remain vulnerable until after South Africa's exclusion from the FTSE World Government Bond Index.

South Africa's Rand steadied as global stock markets recovered from Tuesday's sell-off while oil futures prices clocked up further steep losses on route back toward zero, offfering net-importers of energy a token consolation for the coronavirus crisis that's cratered the global economy. The Rand has still fallen nearly 1% against the Dollar for the week however, and ceded a fraction of a percent to a recovering Pound Sterling.  

Lower oil prices are a relief to the Rand given that South Africa is heavily dependent on energy imports and they might even be balm for the trade deficit were it not for international trade having been all-but stopped by national shutdowns resulting from the coronavirus pandemic, although more notable on Wednesday was the bold aid package announced by the government late on Tuesday, which will see South Africa spend 10% of GDP to support companies and households through the crisis. 

"Of the mammoth stimulus package, which rivals those of its UK and US counterparts in percentage terms, only R130bn will be derived from reallocations in the existing budget – modifications which are still to be announced by the National Treasury," says Nema Ramkhelawan-Bhana, an economist at Rand Merchant Bank. "USD/ZAR continues its flirtation with 19.00. Weaker, though less so than its EM peers, particularly those with strong ties to the oil price as Brent futures fall victim to the negative sentiment that has dragged on its WTI counterpart, dropping to its lowest level since 1999."  

President Cyril Ramaphosa set out in an address to the nation plans to spend RS500bn this year to plug the hole left in the economy by the coronavirus shutdown that was nearing the end of its fourth week on Wednesday, with almost 80% of the package set to come in the form of new and unscheduled government spending. He also said the government intends to set out on Thursday, plans for a gradual reopening of the economy but warned that South Africa is "still in the early stages of the pandemic."

Above: Pound-to-Rand rate shown at weekly intervals with Fibonacci retracements of 2016 downtrend marked out. 

Ramaphosa's package won't fully replace economic output lost to the shutdown and global disruption but it's among the larget fiscal responses unveiled in the emerging world so far and might limit the downside for the country and its economy. It looks set to be part financed by a special International Monetary Fund (IMF) loan that will have only limited conditionality attached to it which, Commerzbank says, might make the idea of international support more palatable to South African politicians and those elsewhere.

"Even before the corona virus broke out there was considerable doubt about the sustainability of South African national finances. This has become even more acute as a result of the crisis," says Elisabeth Andreae, an analst at Commerzbank. "The IMF has now announced that South Africa qualified for loans amounting to USD 4.2bn. as part of the so called “Rapid Credit Facility". This financial aid would entail far more limited conditions, which should make it more attractive. If the South African government were to request this support this might temporarily reduce the pressure on the South African rand but also on other EM currencies; as other countries might follow South Africa’s example." 

A substantial fiscal aid package, lower oil prices and steadying stock markets all offered support to the Rand on Wednesday but the South African currency won't make it completely out of the proverbial woods until after its month-end exclusion from the FTSE World Government Bond Index is over and done with. 

Ejection is the result of Moody's downgrade of the credit rating from 'investment grade' to 'junk' back in March, but the index rebalancing was delayed as a result of the coronavirus pandemic. There has already been heavy selling of South African assets since the downgrade but international fund managers who benchmark to the index will not be prevented from holding the government's bonds until the exclusion has actually taken place so the event itself could yet compell fresh capital outflows, which would weigh on the Rand.  

"USD/ZAR continues to rise back towards its recent new alltime high at 19.3418 (according to CQG data). This we still expect to cap, though. If not, the minor psychological 20.0000 mark and a daily horizontal 0.25 x 3 Point & Figure upside target at 20.7500 will be next," says Axel Rudolph, a technical analyst and Commerzbank colleague of Andreae's. "A currently unexpected slip below the April 9 low at 17.8433 would put the March 9 high and the March 25 low at 17.1793/16.9932 back on the map. While this area underpins on a daily chart closing basis, overall upside pressure should be maintained, though."

Above: USD/ZAR rate shown at weekly intervals with Fibonacci retracements of 2016 downtrend marked out. 


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