South African Rand Draws Hope from Easing of Lockdown but Coronavirus Still Advancing 

- ZAR celebrates plan to ease lockdown restrictions from April 30 onward.

- After Ramaphosa opts for "risk adjusted strategy" to reopen economy.

- Coronavirus has lost momentum in April but is still advancing in SA. 

- Peak may be week or more away and found amid bond index exlcusion. 

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- GBP/ZAR spot rate at time of publication: 23.30
- Bank transfer rates (indicative): 22.45-22.61
- FX specialist rates (indicative): 22.92-23.05 >> More information

The Rand advanced strongly on the Dollar and Pound Friday after President Cyril Ramaphosa offered hope in the form of a plan to ease the economic 'lockdown,' but the coronavirus is still advancing in South Africa and there are also other risks lurking on the path ahead. 

Caught between a rock and a hard place, President Cyril Ramaphosa set out on Thursday night a plan to begin lifting the economic shutdown imposed in order to contain the coronavirus and Friday's European session brought with it strong gains for the South African currency despite weakness in other risk assets like stocks as well as losses elsewhere in the emerging market currency sphere. 

"While a nation-wide lockdown is probably the most effective means to contain the spread of the coronavirus, it cannot be sustained indefinitely. Our people need to eat. They need to earn a living. Companies need to be able to produce and to trade, they need to generate revenue and keep their employees in employment. We have accordingly decided that beyond Thursday 30 April, we should begin a gradual and phased recovery of economic activity," Ramaphosa said in an address to the nation. 

From April 30 South Africa will implement a "a risk adjusted strategy" and move to a five-stage traffic light system  where level 5 restrictions represent the most drastic form of economic lockdown and level 1 denotes a system in which only basic social distancing measures need be deployed. The decision came as South Africa nears the end of its fourth week in lockdown, but also alongside the highest one-day number for new coronavirus infections. 

Above: Number of new coronavirus infections detected in South Africa each day. Source: Worldometer.

South Africa first detected the coronavirus on March 06 and went into 'lockdown' on March 27, at which point the virus began to lose momentum in Africa's largest economy although it is still advancing, logarithmic scaled graphs plotting daily case numbers show. Furthermore, April 23 brought the largest number of new infections for a single day, with 318 new cases lifting the total to 3,953.

"Provinces will be assigned their own alert levels, separate from the national level, which will dictate the amount of economic activity and social freedom that will be allowed. Economic activity will therefore remain compressed for the foreseeable future as the government now tries to balance the need for companies to be operating to protect the jobs of as many people as possible against the risk of a covid-19 transmission blowout. This will probably keep the JSE on the backfoot during today’s trading session and the rand trading at current levels, dipping below 19 to the greenback on occasion, but mostly sitting closer to the 19.10 level,” says Siobhan Redford, an economist at Rand Merchant Bank. “Smokers will be relieved to know that at level four, they will be permitted to buy cigarettes, but those who enjoy a tipple or two will have to wait until we are downgraded to alert level three. The embattled airline industry will only be allowed to start operating with a limited number of domestic flights at level three as rescue practitioners for SAA have communicated that in the absence of further government support and labour agreement, they will have to let go of all employees and sell off the airline’s assets.”

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

The Pound-to-Rand rate slumped -1.35% to 23.27 in Friday's European session while the USD/ZAR rate fell -1.31% to 18.86 as investors appeared to reward the decision to ease restrictions that are widely expected to prompt high single-digit falls in first-quarter GDP and double-digit declines in the second. 

However, all of the indications are that South Africa has not yet reached its 'peak' in the coronavirus outbreak, and some some fear that a premature easing of restrictions would delay the peak and prolong the outbreak.

"Level 4 will apply as of next Friday 1 May, with a gradual and phased-in resumption of economic activity. Some activity will now be allowed with extreme precaution to prevent further viral spread. Some businesses will be allowed to resume operations under specific conditions. However, businesses will be encouraged to adopt a work-from-home approach as far as possible. Ministers will provide details on the process for the phased-in reopening of schools and other educational institutions. Level 4 will see borders remaining closed, except for repatriation of SA nationals and foreign citizens. Furthermore, no travel will be allowed between provinces except for the transportation of goods and special circumstances," says Shireen Darmalingham, an economist at Standard Bank. 

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

"EM currencies look cheap on the chart, but we think it is too early to go long as we will need to see the emergence of a strong global recovery - not our baseline for now. From a long-term perspective, EMFX is highly undervalued: on average, our Compass FX model shows the top 30 currencies about 20% cheap against the USD. Normally such levels of undervaluation have been a good entry point to go long from a one-year perspective. However, entering longs now will be at risk of a lot of volatility as markets realise the speed of the global recovery is likely to be slow," says David Hauner, head of emerging market cross-asset strategy at BofA Global Research. "We are Marketweight South Africa. Bonds trade at a small discount to credit ratings, but we think this compensates for medium term fiscal risks."

President Ramaphosa's decision was announced barely a week ahead of South Africa's delayed exclusion from the FTSE World Government Bond Index, which will see fund managers who benchmark to it prevented from holding the government's bonds in their portfolios. Such exclusion will compel the sale of any bonds that have not yet been removed from portfolios and with foreign investors long active in the South African debt market, some of the sales could lead to capital outflows and pressure on the Rand.

Exclusion is the result of a Moody's downgrade to the South African government local currency credit rating from 'investment grade' to 'junk' back in March, but the index rebalancing was delayed as a result of the coronavirus pandemic.  

Above: Logarithmic scaled chart showing total coronavirus infections in South Africa. Source: Worldometer.

That bond index exclusion could come alongside or soon after the peak of South Africa's coronavirus outbreak if research from Tel Aviv University is correct in suggesting the infection will burn itself out in 70 days with or without 'lockdown'. Professor Isaac Ben-Israel, head of the Security Studies, said his analysis shows the virus will peak afer 40 days.

In Europe, the virus has peaked after roughly that period. Moreover, multiplying the size of an average household in a given country by an initial-exposure-to-government-disclosure interval of between 15 and 18 days predicts the dates of the largest daily case numbers for the UK and Germany, while matching closely in the instances of Italy and Spain. A similar result is also produced for Sweden which has controversially, not imposed a 'lockdown.'

Repeating such a process for South Africa implies a peak some time between April 24 and May 04, with the FTSE World Government Bond Index exclusion coming almost exactly at the midpoint between those two dates and at a time when market concerns about a possible backfiring of the decision to ease restrictions might be at their most palpable. That could mean Friday's gains for the South African Rand are likely to be reversed in a potentially crushing manner over the coming weeks, but also that the emerging market unit might find salvation in the early morning of May as the dust settles on the bond index exclusion and the daily coronavirus case numbers eventually trail off.

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