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As the best-performing emerging markets currency, the South African rand extended its gains as rating agencies held the country’s credit rating at current levels. There is optimism that the SA economy is showing signs of improvement, which is feeding into the rand’s value. For TreasuryONE currency strategist Andre Cilliers, it is critical to look at the political and economic factors playing into the US dollar and euro for clues about where the rand is heading. He speaks to Jackie Cameron, for BizNews, in this week’s Currency Focus podcast.
Andre Cilliers of TreasuryONE on the rand’s performance over the past week:
Yes, it’s been an interesting one. We broke through the 14 level. We went as low as R13.88 on Friday. I think it had something to do with the expectancy of ratings agencies coming out with their reports and they came out quite early. But I think in anticipation of that, we had a bit of a rally, but it’s also got a lot to do with interest rates and the movement of interest rates in America, and the tapering or the non-tapering of quantitative easing, the movement in yields.
There’s a bit of a battle of the giants that’s starting to take place in the sense that we’re also seeing some nice pockets of growth out of the European Union. Their vaccination program has really come off the ground quite well. Their markets are opening up. Some of their lockdowns have been removed. It’s getting into their summer period and we’re seeing some nice pockets of growth. And that’s why I sort of, with a smile on the face, speak about the battle of the giants – who’s going to grow the quickest and the fastest, and what’s the impact of that on the value of the dollar and the value of the euro?
On how growth in Europe will affect the value of the rand:
We are trading with various countries throughout the world and we’ve got a lot of trade with the European Union, and especially on our citrus side, for instance. There’s a lot of our citrus that goes into the European Union but a lot of other trade as well. And if their economy is growing, it bodes well for our exports to the European Union and it also bodes well for – if the demand comes out of Europe – for pricing because you could see prices, apart from demand being lifted slightly because of the growth, [it] could also be that there’s a bit of an increase in pricing, which is well for the exporters from South Africa and our trade of terms.
On whether an improvement the rand can be attributed to an improvement in the South African economy :
Well, we are seeing some improvement in the economy and we have seen last week, during the Monetary Policy Committee of the South African Reserve Bank and the press conference after that, that they’ve also revised their growth figures slightly higher for South Africa. Now, we must remember that it’s not just economic growth that looks on the upside at this point in time. It also means that if growth is better, the income for the fiscal side also looks better because then people are doing better. There’s more spending, there are better taxes, there’s better VAT income, and there’s more income for the fiscal side. And if there’s more income for the fiscal side, it puts a smile on Mr Mboweni’s face.
So it’s a general feel of optimism and it’s amazing how these things feed off. When these things happen and the economy does a little bit better and people feel a little bit better, then they go out and they spend a little bit more. If people are in the doldrums and there’s negativity coming through all the time, then they don’t buy. When they’re positive and they feel that it’s going better, then they don’t mind taking out their credit card and spending a little bit extra on top of what they would normally have spent. And that’s exactly what you want at this point in time.
On why the rand is so strong in comparison to other emerging market currencies:
Well, I think if you look at our yields, our yields are attractive comparatively to the first world countries, number one. Number two, in terms of our standing within the emerging markets space, if you just go and look at Brazil, for instance, that’s seriously still plagued by the pandemic. They recorded something just over 2,800 deaths in one day last week. Russia is still at loggerheads and still has some sanctions against them by the United States. Turkey, we know that’s in the doldrums on their central bank side. We know that their governor was relieved of his duties by their prime minister. We know that there’s interference from the political side, from the government side into the central bank.
So we are – in the emerging market space – ranked fairly well, and I would say fairly at the top of the emerging market space and hence, we’re doing a little bit better during this whole period. If you look at us, and as much as we’d like to criticise the government for a lot of things, I do think that they have actually managed the whole Covid situation – the whole pandemic for the last 18 months – they’ve handled that fairly well. They’ve put money into the markets. They’ve assisted the markets. And there’s always criticism that one can lodge, but in general, they’ve actually handled it fairly well. And if you look at the standing of Mr Ramaphosa within his world rankings as a leader, then he’s doing pretty well and that’s because the situation is being handled well during the whole pandemic.
On how a third wave will affect the rand:
That’s a bit worrisome that we are at the start of a third wave during a vaccination program that’s not getting quite up to speed. But if I read between the lines, then I think it will go better within the next week or two. Some hiccups that we had last week and the first week where it was rolled out to the general public. But – the third wave – I doubt whether that will have a dramatic impact on the value of the rand. I think it will be managed fairly well by the government. And I think when they look at regulations to be implemented to manage the third wave, I think they will seriously look at how to minimise the impact on the economy and rather look at social gatherings and stuff like that – to avoid gatherings, etc., and the spread of the virus but keep the economy going as good as possible. So I think it will be managed quite well. And if I look at the figures, I also think that the third wave might not be as severe as was initially anticipated that it could be.
On where the rand will be heading now in relation to the dollar:
Well, we have to look at the value of the dollar. It’s very possible that the rand could go fairly well below 14. I’m not going to go as far as [to say] it’s going to go into the 12 levels, but we have to watch the value of the dollar and what it does to the euro and to the pound – what it does to the first world countries like that. If we are going to see a euro going to 130, then, you know, if you were to make some calculations and you say, if the exchange rate of the rand to the euro just remains around the 17 level, and you take that divided by 1.35, then the rand could go to R12.60.
But it would be my opinion that that’s not going to happen. If the value of the euro goes as high as 135, for instance, I think we would see cross rates going up to the 18.25 levels. So we would lose value against the euro because of the strength of the euro. And in such a case, then you would be looking at a level of the rand around R13.30. My forecast would be that we can go below 14 but if that happens – and that’s only on a much weaker euro, a euro going very much higher – then we will remain within a R13.40 to R13.80 bracket. That movement is not something that’s going to happen overnight. That’s something that will happen over the next year if it happens. So I’m not too concerned. For this year I think we remain within a trading range of R13.80 to R14.50, ending the year closer to the R14.50 levels.
On circumstances that might throw the rand out of sync:
Quite a few interesting ones that [could] come out in terms of figures. Out of the US, we expect consumer confidence. We expect personal income. We get the GDP annualised quarter and quarter figures. So there’s a number of figures out of the United States. From Tuesday actually right through to Friday. Those are numbers that’s going to give us a very good indication of how well the economy is doing and how well the growth is going. And then we also have quite a number of members of the Federal Reserve that speak out and have press conferences, and then we’ll get a feeling from their side as to what we can expect from the Fed going forward in terms of tapering on the quantitative easing – whether they will or whether they won’t, and what the impact of that can be on short-term interest rates. And that can determine the path of the dollar and [whether] we’re going forward with a sharp weakening or sharp strengthening – some resilience or not. Just a few things this week that can upset the apple cart. But I don’t think it will, and I think we will have a fairly stable week trading between R13.90 [and] R14.20.
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