Importers should take advantage of stronger rand

Memories of Nenegate and its catastrophic impact on the currency fade slightly when one considers that the rand (compared to the dollar) has had a stellar year thus far – it is the best performing emerging market currency over the past six months, and comes in at third position for the year to date, after Brazil and Russia.

By the market close on Friday the rand had bounced back from the critical support level of R13.60 (where it was flirting with the next support level of R13.54) to R13.81, on the back of Trump optimism.

The USDZAR has range-traded since August, Nedbank Capital’s Mohammed Nalla said in a note last week. “Geopolitical tensions, local social unrest and local political events have resulted in interim periods of sell-offs, to peak between R14.50/$ and R14.70/$. These levels will likely act as interim support for the rand.”

The rand has tested the R13.25 level three times this year, and although it has bounced back up each time, the more times a technical level is tested, the greater the possibility for a break of the level, Nalla says. A break could propel the USDZAR to the R13.00/$ and R12.85/$ marks.

The trend has been broadly appreciating since January when it hit R16.85 to the dollar. At this point it was considered undervalued. “Last year we faced a perfect storm with local politics (Nenegate) intersecting with fears about weak global growth and a hard landing in China,” says John Orford, portfolio manager at Old Mutual Macro Solutions. “We are still on the cheaper side of the long run trend in the rand.”

While there has been volatility around risk events and South African politics, if the trend continues, the rand could gain further, he adds.

In the rand’s favour is the fact that global growth has been improving since February this year with indicators like manufacturing PMI moving from contraction to expansion territory in many countries around the world. With this commodity prices are improving and if the agreed-upon oil cutbacks hold, the oil price will also rise. Markets have also relaxed since Trump’s victory, with analysts now anticipating fiscal stimulus (tax cuts and infrastructure spending), rather than trade wars. “We may be entering a better period for global growth,” Orford says.

Locally economic fundamentals are also rand supportive. The current account deficit has narrowed as imports have slowed and exports have done better on the back of improved commodity pricing. As a result South Africa’s terms of trade are improving – which means in effect that the country is becoming (marginally) wealthier. This is rand supportive. Another positive, Orford says, is that inflation has peaked and should come down in 2017.

Risks include domestic politics, which is a key driver of the rand. “All we know is that Zuma appears to be reined in every time he goes on the offensive and that in December next year the ANC will appoint a new leader.

Another risk is that growth in the US accelerates forcing the US Fed to push up rates faster than anticipated. This will ensure the dollar appreciates faster than imagined.

With these factors in mind, South African importers and exporters with open exposures into 2017 should lock down those exposures and try to capitalise on relative currency strength, says Richard Beddow, founder and MD of Forex People, which facilitates forex transactions for SMEs. “Importers may be tempted to take their chances buying their FX at the prevailing spot rate rather than paying a slight premium for flexible forward cover. Relying on the spot rate could be commercial suicide – even if you have negotiated favourable payment terms. A swing the wrong way in the rand will devastate margins because the local market will not budge off the rand price that was agreed upon with the importer. Suppliers have no fat in their margins to absorb a wild swing in the rand,” he says.

Rand strength aside, volatility will be the order of the day in 2017. “This is being described as the ultimate year of living dangerously. We sidestepped the rerating and have simply kicked the can down the road,” says Beddow. “Our economy is predicted to grow at 0.5% next year, ensuring another tough year economically. Political events will dominate the news as we head towards the ANC conference in December 2017. Growth and political stability are the two issues that the ratings agencies watch,” he says.

While exporters typically make hay when the rand is weak, they can also take advantage of forward cover by fixing the rate for future FX income. This usually earns them a premium on the current spot rate. “I’m always amazed at how few exporters know that they can sell forward,” says Beddow. “The problem is the quality of advice small business gets from the banks is often not very good and they get sold very rigid forward contracts that do not take their individual circumstances into account.”

2017 is not a year importers want to play games with the currency or take their chances with spot market. “We don’t know where it is going, but we know it’s going to be very volatile.”

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