- ZAR nearing end of recovery road after months long rally slows.
- Valuation, debt burden, fresh virus woes risk economic setback.
- Developing economies' longer vaccine wait also a blow to ZAR.
- Leaves move below 15.0 viewed as bridge too far for USD/ZAR.
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- GBP/ZAR spot rate at time of writing: 21.51
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The Rand's recovery slowed this week as a resurgent coronavirus threatened to deal a final quarter setback to an already vulnerable economy that has a debt burden which was already expected to impede further gains for the South African currency in the year ahead.
The Rand softened on Friday, leaving intact an important support level for USD/ZAR and sealing the deal for what will be the South African currency's smallest weekly gain since before the U.S. election in early November.
This is after USD/ZAR bounced off the 78.6% Fibonacci retracement of its 2020 uptrend, located around 15.08, during the Thursday session when President Cyril Ramaphosa placed Nelson Mandela Bay, the Sarah Baartman District in the Eastern Cape and the Garden Route District in the Western Cape back into a form of 'lockdown.'
He said there were 4,400 new infections on Wednesday, the largest increase since mid-August, and that hospital admissions were at 5,800 after rising from 4,900 in early November. It took just four weeks between the middle of June and July for new daily infection numbers to rise from aruond 4,000 to their peaks in excess of 13,000.
"This imposition of differentiated lockdown restrictions is more sensible than raising restrictions for the whole of country, with the South African economy already very severely damaged from the harsher curbs to economic activity earlier in the year, and unemployment very high. Further restrictions are likely in SA’s hotspots as the festive season gets under way," says Annabel Bishop, chief economist at Investec. "SA is likely to continue to risk disruptions from Covid-19 to its economic activities over H1.21."
Above: USD/ZAR rate shown at daily intervals with Fibonacci retracements of 2020 rally.
Thursday's decision to tighten up restrictions on activity came just days ahead of Tuesday's third-quarter GDP numbers, which are expected to confirm that South Africa saw a robust start to its economic recovery in the three months to the end of September. The market consensus favours a 50% quarterly rebound for the period.
But the rapid bounceback will be slowed if-not placed on hold in the final quarter by new virus-containing measures in some parts of the economy including a night time curfew, restrictions on the sale of alcohol and limitations to the size of permitted gatherings.
South Africa's economy contracted at a quarter-on-quarter pace of -51% during the original national shutdown earlier this year and although the impact of the latest measures is expected by economists to be much less than that, the country can ill afford anything that raises its already high debt burden.
"Despite sovereign downgrades from both Moody’s and Fitch last week – both leaving South Africa on a negative outlook – South African sovereign bonds are rallying hard, pricing of default protection is dropping to the lowest levels since February and USD/ZAR is not far from its recent lows at 15.10. Undoubtedly the search for carry is driving these trends. But ZAR is one of the few EM currencies we dislike in 2021 with the debt overhang sadly a real strain for the country," says Petr Krpata, chief EMEA strategist for currencies and interest rates at ING.
Above: Investec Forecasts. December 2020.
ING and Investec forecasts demonstrate the extent to which the South African Rand recovery is expected to slow up ahead, given USD/ZAR fell six percent from around 16.25 between the end of October and early December.
Investec forecasts the exchange rate will not make it below 15.0 this year or next, which is also the bottom envisaged by ING in its year-ahead outlook.
South Africa's rising budget deficit and badly damaged economy have already compelled further credit rating downgrades from Fitch and Moody's in recent weeks, but the country faces further economic turmoil heading into the New Year as well as a longer wait to access a coronavirus vaccine than major economies. This could mean additional downgrades further down the line and may have implications for international investors' appetites for South African government debt as well as the Rand.
"ZAR is now fairly valued based on our medium-term BEER model. with the Covid-19 induced valuation gap now fully closed. This points to more modest ZAR upside, with USD/ZAR unlikely to break meaningfully below 15.00 next year. Rather, we like short ZAR against RUB as a regional relative value hedge against deteriorating risk appetite as ZAR should be more vulnerable during risk off periods," Krpata says.
Above: Pound-to-Rand rate shown at daily intervals.
Britain became the first to approve the Pfizer and BioNTech vaccine this week but has also struck agreements with others who're developing candidate immunisations. The government says it can provide for around a third of the population in the first quarter of 2021 and for by year-end 2021.
Canada has achieved a similar level of provision and likewise for the U.S., while the other major economies are not far behind.
However, all of the major economy plans assume that logistical hurdles to mass production such as the capacity to manufacture, or simply transport and store the vaccines, does not prevent deployment in the timeframes envisaged and this is far from guaranteed.
"Poorer nations are expected to see lagged outcomes, and continue to battle with heavy sovereign debt loads. A number of these economies, including South Africa, have structural impediments to faster economic recoveries as well, in turn limiting the recovery of their currencies," Investec's Bishop says.