Is down the rand’s only direction?

Ashburton Investments fund manager Tony Cadle, says the fate of the rand is almost entirely reliant on the performance of the US economy.

The rand rallied on Wednesday, reaching below the R15/$ mark for the first time this year, following US Federal Reserve chairperson Janet Yellen’s dovish comments regarding the Fed’s approach to rate hikes. Yellen advised caution, citing volatile global economic headwinds, curbing expectations of an imminent rate hike and providing some relief for emerging market currencies.

The rand had appreciated by 1.67% against the dollar at 14.9064, 1.67% to the pound at 21.4243 and 1.28% to the euro at R16.9054 by 20:55.

“We already know about the politics and most commentators already believe we’re going to be downgraded,” says Cadle, “so, I think movements are going to be dependent on US economic data”.

It goes to show how much happenings in the US impact the rand.

Cadle doesn’t believe the rand is necessarily headed in one way or the other, but that its recent strength could be a signal of an end to the dollar’s dominance, which lasted for 18 months leading up to December last year.

“If you look over those 18 months, most currencies, including developed world currencies, depreciated by around 30% against the dollar. Subsequent to that, the economic data coming out of the US has not been that strong,” says Cadle, adding that the purchasing managers index had dropped in recent months and only started picking up last week, which could signal strengthening of the dollar if the trend were to continue.

“I think what you’re going to find this year is that the dollar is going to be quite volatile. At Ashburton we are pricing the rand at around R16 to the dollar. But we would not be surprised if it went to R17, nor if it went down to R14.”

Bart Stemmet, senior economist at NKC African Economics, says the jobs data coming out on Friday will give the most accurate measure of where the US economy stands, but that the rand remains undervalued, even at current levels. He believes the threat of a ratings downgrade has already been priced into the market and foresees more weakness for the rest of the year, unless there is a big crisis.

“I expect the rand to start strengthening at the end of the year, going into 2017,” says Stemmet. “Jobs data from the US and the local trade data (coming out on Thursday) might have an impact on the rand, although the latter tends to be very volatile. But those are probably going to be the drivers this week. I don’t expect movements to be too drastic unless the jobs data is far beyond expectations.”

It’s a sentiment that Cadle agrees with, saying South Africa still has twin deficits in its current account and fiscal deficit.

“And then you have inflation, which is a lot higher than that in the States. So you would expect the rand to continue to devalue by around 4% per annum, which is the inflation differential between the two economies.”

Important dates for the rand in the coming week

Meanwhile, the date for the Moody’s announcement on whether it will indeed downgrade South Africa’s credit rating is pending. Cadle says the decision may or may not be be immaterial, depending on whether one believes that a downgrade has already been priced into the currency and bond markets. Nevertheless it should be a significant day for the rand.

Stemmet says that, even if a downgrade is expected, the currency will still dip momentarily before correcting. But there is no set date for that possible eventuality.According to this Moody’s document, the evaluation could take up to six months.

The document reads: “The time between the origination of a rating review and its conclusion varies widely depending on the reason for the review and the amount of time needed to obtain and analyse the information relevant to make a rating determination. In some cases… reviews can sometimes last 90 to 180 days or even longer.”