South African Rand to Hold April Ranges, Avoid New Lows Major Bank Says

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- GBP/ZAR spot rate at time of publication: 23.14
- Bank transfer rates (indicative): 22.33-22.49
- FX specialist rates (indicative): 22.79-22.93 >> More information

The Rand was on the back foot Wednesday after ceding ground to the Dollar and Pound although global factors are tipped by one major bank to remain in the driving seat for the time being while the South African currency is expected to hold within the trading ranges set back in April.

South Africa's Rand was on the defensive in a session where stocks, commodities and other risk assets were all also in retreat after Automatic Data Processing Inc figures revealed the largest one-month fall in U.S. payrolls on record. This came with U.S.-China tensions back at the fore after Secretary of State Mike Pompeo reiterated the allegation that there's "significant evidence" the coronavirus escaped from a research lab in the China's Wuhan. 

International factors drove the Rand lower although domestic influences may also have ensured that it trailed only the equally troubled Turkish Lira, with national power monopoly Eskom announcing that it has lost R2.5bn due to a "dramatic reduction" in power consumption from the mining sector. This was as Public Enterprises Minister Pravhin Gordhan said the government has sank R5.5bn into South African Airways this year and that it will soon announce a new rescue plan. These troubles were aired in the same session Business for SA (B4SA) warned South Africa could see its economy shrink by up to -17% this year due to the coronavirus.

Above: USD/ZAR rate shown at weekly intervals, establishes itself above 100% Fibonacci retracement of 2016 downtrend.

"We think that in the short run, global factors will continue to influence the directionality of the rand against the dollar more substantially than local factors," says Nimrod Mevorach, an emerging markets strategist at Credit Suisse. "It follows, in our view, that only fresh domestic catalysts would be able to drive USDZAR substantially away from the trends seen in the global EM FX complex (for example by taking USDZAR well above 19.35 without being helped by a corresponding move in the global EM FX index)."

Mevorach says the Rand would only be in danger of falling to new lows if domestic news-flow deteriorates substantially. This would take something like political instability in the African National Congress or a failure by the government to secure the international loans that make up nearly one fifth of its emergency coronavirus-related economic support package. Government will spend RS500bn this year to plug the hole left in the economy by the coronavirus shutdown that's beeen being eased since April 30.

Near R80bn of the package is coming from the International Monetary Fund while some remaining money is to be drawn from other international organisations. This cannot completely fill the void opened up in the already-in-recession South African economy by the coronavirus, although it is crucial to limiting that damage. Neither an ANC fallout nor a loss of access to international funding is a sufficiently likely risk to make Credit Suisse's base case. 

Above: Pound-Rand rate at weekly intervals, frustrated by 78.6% Fibonacci retracement of 2016 downtrend.

Credit Suisse looks for the USD/ZAR rate to remain within its 17.81-to-19.35 April rang. Short of a sudden and widely unexpected increase in Sterling, this would keep the Pound-Rand rate below its recent peak and deprive it of a run at its own all-time high that was set back in January 2016. The Pound-Rand rate had risen 27.35% from New Year to its peak April but has been roadblocked by the 78.6% Fibonacci retracement of the 2016 downtrend located at 23.57. This guards the path to the 25.78 all-time high.

"SA’s exclusion from the WGBI has seen the rand reach worst levels this month so far of R20.77/EUR and R23.71/GBP however, as some of the US$ weakness in improving global risk sentiment obscured the impact of the WGBI exclusion on the ZAR/USD," says Annabel Bishop, chief economist at Investec. "The rand later this afternoon was trading at R18.68/USD, R20.38/EUR and R23.20/GBP, as usual gaining most of its direction from international events, with markets perceiving the global backdrop somewhat less optimistically than last week. Volatility remains the main feature of the domestic currency."

Wednesday's price action comes just days after the government's bonds were excluded from the FTSE World Government Bond Index due to a delayed rebalancing resulting from Moody's downgrade of the local currency credit rating from 'investment grade' to 'junk' in March. This saw fund managers who benchmark to the index compelled to remove the bonds from their portfolios. 

Above: Investec exchange rate forecasts for base case scenario. Features scenarios considered to be the most likely.

Casual observers wouldn't necessarily this from looking at bond market price action last Thursday although that's only because the South African Reserve Bank (SARB) sprung into action in late March and has since effectively called time on a rout in local bonds through a bold expansion of its monetary policy toolbox. The SARB began quantitative easing (QE) in March and has been buying South African government bonds as a result, which has halted the rout in prices and kiboshed a runaway increase in yields.

Since then the 10-year bond yield has slumped from an astronomical 12.34% to 9.78% by Wednesday and in the process, offered a tepid form of relief to all South Africans who're adding new liabilities to their balance sheets given the 10-yr is the nation's 'risk-free' rate that gets baked into all other interest rates charged across the economy. But QE has not done much for the currency, which needs a global economic recovery to lift it sustainably off 2020's lows.

"I never thought I’d see the day when a spot crude price of US$30/bbl is celebrated, and yet here we are. The promise of further production cuts paired with an easing in lockdown restrictions globally has tilted the supply-demand dynamic in favour of a modest price lift, dragging the gold/oil ratio further away from its 30-year high. The measure is a marker for risk appetite, signalling improved sentiment toward the prospect of a global recovery," says Nema Ramkhelawan-Bhana, an economist at Rand Merchant Bank. "That level of cheer is not evident in the local economy despite Moody’s and WGBI-related event risk falling away. With SARS preliminary estimates suggesting that tax collections will be down by 15%-20% from those forecast in this year's budget, SA’s economic vulnerabilities are being laid bare."

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