Welcome to a Watershed Week for the South African Rand

For those watching the development of the rand’s 2016 journey must be aware that this week will see the ZAR reaching a crossroads.

“It is not entirely beyond the realms of possibility that should these events and data go against the Rand we could see the Rand trading above R16.00 quite comfortably by the week’s end." - Treasury One. 

The South African rand is on the move higher at the start of the new month, following its commodity currency bretheren higher. 

The move is therefore largely due to global factors, rather than domestic factors at this stage. 

The British pound's gentle uptrend against the South African rand appears to have reversed in rude fashion with the exchange rate seen towards 22.69 thanks to the recent poll-inspired decline in sterling.

Note though that GBP/ZAR still trades above the key 20 day moving average, therefore momentum remains positive and we would urge patience when approaching the pair as it could still turn higher once more.

The US dollar to South African rand exchange rate is meanwhile touch of its month’s highs at 15.67 and as we hear below, it could well crack above 16.00 over coming days.

The Big Events for the Rand this Week

Price action in ZAR over the past week can best be described as being consolidate in nature, we get the sense that markets are waiting for the outcome of two events that will have far reaching implications for the outlook, both due to fall this week.

The release of US employment data will be keenly anticipated by a market wanting to know whether the US Fed is ready to raise interest rates in June/July.

The movement of US interest rates is incredibly important to the South African currency as it will determine whether there is an increase in the number of investors willing to shift their investments out of South Africa and into the US.

Global money chases yield, and the prospect of higher returns becoming available in the United States, which enjoys a considerably lighter risk premium than South Africa, could well see a pick up of ZAR into USD flows.

Such an event would pressure the USD/ZAR exchange rate higher.

Latest Pound / SA Rand Exchange Rates

	Live: 22.6363▼ -0.07% 12 Month Best: 25.4721
*Your Bank's Retail Rate	21.8667 - 21.9572
**Independent Specialist	22.3194 - 22.41 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

Petr Krpata, an analyst at ING, confirms the ZAR is particularly exposed to this dynamic:

“As per Payrolls Preview, our economists are looking for a fairly solid outcome, expecting NFP to print above 200k, unemployment rate to fall to 4.9% and hourly earnings to remain close to the 2.5%YoY. At this point, wages are likely to bear the most importance and a number close to 2.5% should be enough for the Fed to proceed with a rate hike in upcoming meetings (and for the market to adjust its expectations accordingly).

“In the CEEMEA high yielders space, we expect TRY and ZAR to be more vulnerable than RUB. The former two are more sensitive to the Fed outlook and the portfolio flow channel, while the latter is being driven by the oil price (which was stable in May). At this point, domestic politics in Turkey and South Africa also pose larger risk to the respective currencies vis-a-vis RUB.”

Ratings Agencies in Focus on Friday

Also determining whether money flows out of South Africa will be the outcome of the S&P and Fitch credit rating revisions due on Friday.

Were either agency to downgrade their rating on SA credit we would expect the rand to come under pressure. Many investors are governed by tight rules pertaining to investment gradings and are only allowed to invest client funds in jurisdictions that enjoy a certain risk rating.

A downgrade to South Africa’s rating would force their hand and see them sell their SA exposure.

Standard & Poor's credit rating for South Africa stands at BBB-.

The threat of a credit rating downgrade to subinvestment looms large after Standard & Poor’s changed its South Africa outlook from stable to negative in December on its rating which is one grade above junk status.

Moody's rating for South Africa sovereign debt is Baa2.

Fitch's credit rating for South Africa is BBB.

“It is not entirely beyond the realms of possibility that should these events and data go against the Rand we could see the Rand trading above R16.00 quite comfortably by the week’s end. The other argument is that the rating agency effect will be reduced because it has already been priced in and there is more scope for the Rand to strengthen should South Africa not be downgraded,” says a note from Johannesburg-based brokers Treasury One.

There are some arguments that go it can’t get worse for the Rand as the Rand has survived some real shocks in the past six months, and came out at the other end still mostly intact.

“One thing is for sure; the Rand will have a knee-jerk reaction to whatever the elements throw at it on Friday. The only constant for the Rand so far this year is that there is always an overreaction to any news and that trend will most likely continue. Opinions about the currency market are as individualistic as the market players making them but expect a volatile week at best,” say Treasury One.

Petrol Price Rises Could Prompt Another SARB Rate Rise

What could support ZAR longer-term are even higher interest rates down the road.

The local petrol price will increase by 52 cents a litre for all grades, while diesel will increase by 76 cents per litre at midnight.

The increases are due to a 10% increase in oil prices and a 5% depreciation of the rand against the US dollar since the beginning of May.

This could keep the South African Reserve Bank (SARB) on a hawkish tone, i.e one that warns of further interest rate rises down the road. The a possibility of a 25bp hike remains elevated, which should support ZAR as investors will always seek out higher yields, even if ratings agencies deliver downgrades.

“However, we still think the SARB has reached a peak in its hiking cycle,” argue Treasury One.

The problem with interest rate rises is that they do have the knack of killing off business investment - it’s not hard to understand why businesses tend to borrow less at higher interest rate levels!

The SARB therefore finds itself in a tricky position - does it cut and support the rand or does it stand pat and support business investment.

Either way, the outcome of events this week should shed some light on the matter.