Rand strengthens: What’s next? In-depth insights from currency strategist Andre Cilliers of TreasuryONE

In this week’s Currency Focus podcast, valuable pointers on where the rand is heading in relation to major currencies: Investors want higher interest rates but they aren’t coming – the US government has made that clear, but many aren’t listening, says currency strategist Andre Cilliers of TreasuryONE. That in turn, he notes, has implications for the value of currencies in relation to the US dollar, including the rand. In this in-depth interview, Cilliers shares his reading of global and domestic data and currents in the markets with BizNews. If you were listening to Cilliers on BizNews last week, you would have already known that the rand was set to strengthen soon – as it did this week, breaking through the R14 line. – Jackie Cameron

Andre Cilliers of TreasuryONE on what’s happening with the rand:

What’s happening with the rand? It’s an interesting one. We’ve seen the rand jumping below the 14 levels early this morning [10 May]. That all has to do with, as we said last week, it’s a commodity story. It’s the story of the trade surplus. We’ve had numbers out from the government saying that the tax collections looks better and the deficit – as a percentage of GDP – is much lower than anticipated in the beginning.

Secondly, commodity pricing – gold trading above 1840 as we speak, platinum, copper and iron ore has increased. On top of that, we had the US coming out with their Non farm payroll figure on Friday, which missed the targets way off. That simply says to us [that] interest rates are going to remain low for a little bit longer than anticipated. The market wants to see a change in interest rates and that’s not what they’re going to see. I think the Fed really spelled it out for them. We will not raise interest rates unless we see inflation.

On what he expects to happen to the rand in relation to the dollar:

I think that the inflation figures are going to come out, maybe, slightly below target – indicating that they still no inflation that needs to be concerned about. That’s going to underline the fact that no real interest rate increases can be expected out of the US for quite some time. That will put the dollar on the back foot further, from what it is currently. We might even see the euro going above the 122 into the mid 122, further bolstering the strength of the rand against the dollar.

On whether the rand could potentially get stronger this year:

We said last week that the rand is still in an undervalued area – that still remains. As long as we now actually do better on the fiscal side and tax collection looks better – and there’s less pressure on the fiscal side to borrow more money and they keep spending under control – then that part of the story actually also starts positive. Yes, very much likely that their end will remain in fairly strong territory for quite some time.

On the rand vs the British pound:

If we see the dollar weakening and the pound increases, I think there’s a very good chance that the pound could actually increase a little bit more in value, than what the dollar actually weakens against the basket of currencies. The pound could do better. That’s simply because I think the economy will start looking better. I think the whole Brexit situation is starting to play out not too badly. If the pound then gains more value, then we could see that the strong pound against the dollar could hold back on the rand actually gaining quite substantially on that – as it would against the dollar. We could see the cross rate of the pound actually weakening slightly – not a lot – but slightly weakening bias to that side, because of the pound actually doing better.

On how the euro may play out this week:

If the dollar weakens, then we’ll see further strength of the euro. But I think euro country – with their low interest rates – and also no indication that that’s about to change. Their economy is still slow out of the blocks. On that side, the pound could gain on the euro and the rain could, most probably, remain fairly consistent. We could see the euro trading between a 16.90 and a 17.30 level. But, fairly stagnant movements of their own against the euro. The Euro, in other words, not gaining that much.

On the Chinese yuan:

There’s the continuous discussions between America and China on trade talks, for example, placing the Chinese yuan in a, I wouldn’t say in a bit of a tight spot, because that can react fairly aggressively to what happens between the talks. Overall, I think the yuan has got a very good chance of actually strengthening against the dollar, simply because of the weakness of the dollar, people moving closer and emerging markets doing better – of which China is still one.

I think the yuan could also appreciate quite a bit against the dollar, which means that it would also appreciate a little bit against the rand, because the strength of their economy is quite better than ours. There I would be looking to a slight weakening of the rand to the Chinese yuan.

It’s becoming easier to back SA’s world-beating rand

By Colleen Goko and Vassilis Karamanis

(Bloomberg) – The rand’s 30% gain against the dollar since the height of the pandemic has outstripped emerging-market peers – and the rally may not be over yet.

South Africa’s currency has recovered all its losses since it slumped to a record in April last year, and then some. Strong commodity prices and the global search for yield should support the narrative for further gains in coming months. Domestic fiscal metrics – though still far from healthy – are improving along with terms of trade, while the government’s crackdown on corruption is also fuelling positive sentiment.

The rand extended its rally on Tuesday, advancing 0.4% to 13.9877 per dollar by 11:13am in Johannesburg.

It’s becoming easier to back South Africa’s currency, and these charts illustrate why:

Bond investors return

After record outflows from South Africa’s bond market in the first four months of the year, last week’s disappointing US jobs numbers heralded a reprieve. Foreign investors bought a net R5.2bn ($370m) of South African government debt on Friday, the biggest in inflow since November, as the move lower in Treasury rates gave new impetus to the search for yield. Together with a healthy trade surplus fuelled by rising commodity prices, those inflows could be rand-supportive in coming months.

Technical cheer

The dollar last week tested a pivotal area at 14.40-14.50 after consolidating in the second half of April. Failure to breach resistance meant that rand bulls got the upper hand once again, as shown by the fear-greed indicator, and the pair fell to fresh cycle lows. In the longer-term, the rand seems to be in the final stages of the ABC correction of an Elliot Wave Cycle that started in 2011 and was completed in early 2020. The dollar may weaken toward the 11.50 handle, according to the pattern.

Encouraging options

Demand for dollar topside exposure took a hit as key resistance around 14.50 held. While greenback calls still trade at a significant premium, bearish sentiment for the South African currency, as measured by one-month risk reversals, has moved to the lowest level in three weeks, with room to extend toward February range extremes.


Shiny prospects

The correlation between the Bloomberg Industrial Metals Sub-Index and the rand has strengthened to 0.6, near its strongest level this year. Industrial metals account for about a quarter of South Africa’s export earnings, bolstering the current-account balance, for long the rand’s Achilles heel. The current account may be in surplus this year, according to the median forecast in a Bloomberg survey.


Best bet

The large inflows from loans South Africa procured from the International Monetary Fund and New Development Bank amid the height of the Covid-19 pandemic have created a surplus of dollars in the local banking system. That’s lifted USDZAR basis swaps well above the long-term average, making it expensive to short the South African currency. With more inflows expected this year from a World Bank loan and Eurobond issuance, the cost of betting against the rand will remain elevated for some time.


(Updates with rand move in third paragraph)

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