Analysis & Profiles 6.4.2016 01:10 pm

What? Why the rand will continue strengthening

Picture: Thinkstock

Picture: Thinkstock

Global sentiment and better domestic economic prospects could have a positive effect.

Despite the hawkish and ‘careless’ appearance of President Jacob Zuma as well as the ANC against the Constitutional Court verdict on the Public Protector’s Nkandla report, the verdict itself as well as domestic and global economic prospects will favour the movement in the rand in weeks to come.

The US jobs report that was released on Friday, the financial market stability in Japan and Europe that has receded and domestic economic data supports the sentiment of a stronger rand in the short to medium term.

US data

The gradual approach of ‘possible’ rate increases in the US was supported by the latest employment data, showing that although more jobs were created (215 000 in March), the unemployment rate increased from 4.9% in February to 5.0%, as more discouraged US workers entered the job market looking for opportunities. This in return keeps the average hourly earnings lower than expected.

In March, average hourly earnings for all employees on private non-farm payrolls increased by 7 cents to $25.43, following a 2-cent decline in February. Over the year, average hourly earnings have risen by a modest 2.3%. It is expected that this will put less pressure on the domestic inflation rate as: “Personal income increased $23.7 billion, or 0.2%, and disposable personal income (DPI) increased $23.7 billion, or 0.2%, in February”, according to the US Bureau of Economic Analysis. These are lower than the 0.5% and 0.4% respective increases during January 2016.

The bureau also reported that: “Wages and salaries decreased $9.4 billion in February, in contrast to an increase of $46.5 billion in January. Private wages and salaries decreased $12.9 billion, in contrast to an increase of $41.9 billion during January.” This data underlines the Fed’s latest forecast that inflation in the US will reach 1.7% in 2016, lower than the 2% target necessary for interest rate hikes.

This will likely lead to the Fed abstaining from increasing rates before the second half of the year, causing emerging market currencies (also the rand) to appreciate further.

EU stocks

European stocks rose for the first time in three days on April 4 on confidence that the stronger US economy and better financial stability in Europe and Asia would help global growth.

Domestically, the South African Revenue Service (Sars) collected R1.0699 trillion in taxes during the 2015/16 year. This is R154.07 million more that the target set out in this year’s budget speech by finance minister Pravin Gordhan. This is the first time that Sars collected more than R1 trillion and is remarkable, given the lack of economic growth in South Africa. This increase in tax revenue may lead to a lower central government debt to GDP than budgeted for (3.6%). In this regard, foreign grading agencies and investor sentiment towards the country will have a positive effect on the rand exchange rate.

A second real economic development involves the trade account. South Africa’s trade deficit decreased sharply to R1.07 billion in February of 2016, compared with an upwardly revised R 17.96 deficit recorded in January 2016. Of interest is that exports rose 27.7%, as vehicle and transport equipment sales rose sharply. Against this sharp increase imports are up by only 2.7%, mainly due to higher purchases of vegetable products. For the year to date the trade deficit has decreased by 38.5% to R 19.03 billion. This is only 61.4% of the R 30.96 billion the previous year.

The aforementioned more positive global sentiment, together with better domestic economic prospects, is likely to impose an appreciative effect on the rand over the next few months. Together with more positive political sentiment that the South African Parliament will be able to deal with the current Constitution matters and corruption, prospects for a downgrading to junk status are likely to dwindle. This in itself will contribute to a stronger and more stable currency in months to come.

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