US election uncertainty gives the Rand a boost

With the US elections generally supporting risk assets, the rand this week outpaced peers as best performer among the group of EMs we track.

Local bonds also rallied more than peers, says dr Elna Moolman, head of macroeconomic, fixed income and currency research at Standard Bank SA.

“However, despite this bond market rally, bond yields are only modestly below our year-end forecasts. In contrast, the Rand’s strength relative to our year-end forecasts is more pronounced. It is not only relative to our forecasts that the Rand’s outperformance seems even stronger than that of bonds – the Rand also appears quite strong compared to its peers, while bonds appear more reasonable on a relative basis,” she says.

Moolman believes that the support from global sentiment, related to the US elections, for risk assets still may have legs.

“Furthermore, we maintain that in the medium term the Rand will likely be even stronger than now. However, the Rand may well relinquish some of its recent gains around the time of the late-November sovereign credit rating reviews when rating agencies, even if they don’t declare negative rating action, will still likely be downright bearish.”

She says while the Rand has recently been pulled along by the supportive global tide, investor concerns around South Africa’s fiscal risks may resurface again soon enough, thereby curtailing rand strength.

Paul Marais, MD of NFB Asset Management, says the current situation is exactly what markets theoretically did not want: an unclear result, a candidate declaring himself the winner without official verification and threats of legal action. However, he says, ironically the markets are not responding negatively to all this uncertainty.

“Should the election outcome be contested, market volatility is likely to increase which will result in more people moving money to cash as they adopt a wait and see approach. The extent of the market volatility will depend on how badly contested this election is and whether the loser concedes, or fights and then concedes, or fights to the bitter end, culminating in a legal challenge.”

Marais says this is the theory, but the reality is that US markets were up strongly last night, including the S&P, which was up 2.2%.

“Similarly, the South African equity market has been flying today, up 2.5%, and up 8% over the last week or so. The Rand continues to be very strong too, well under R16 to the US dollar, with speculation that it could go to as low as R15.”

Prof Jannie Rossouw, interim head of the Wits Business School, says the dollar is falling due to uncertainty about the outcome of the presidential election, but people must remember that the Rand was exceptionally weak.

“The good news is that the Rand can stabilise at this level.”

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