Positive outlook for rand despite cabinet reshuffle – TreasuryONE’s Andre Cilliers

In this week’s Currency Focus, TreasuryOne currency strategist Andre Cilliers once again gives us the lowdown on the rand’s movements. Overall, Cilliers is positive that the rand will stay within a trading range of R14.50 to R14.90 despite a new finance minister for South Africa and other factors that may have impacted the rand’s performance. “I still foresee fantastic trade balance figures, good surplus figures, and terms of trade for South Africa, still very much on the up and on the positive, aiding the currency at this stage.” – Claire Badenhorst

Andre Cilliers on his predictions for the rand in the short-term:

Best guess would be that we going to remain within a trading range this week and next week and for the very foreseeable future of R14.50 to R14.90. The rand seems to be very happy in those parameters at the moment. Unless we see something dramatic coming out of the FOMC (Federal Open Market Committee) – and we have their minutes coming out this week – we will remain within that range.

If we analyse the FOMC and the minutes and the discussions and the press conferences by Mr Powell over the last couple of weeks, then two things that they [are] saying. They’re happy with inflation at the higher levels. They would prefer seeing further employment closer to full employment levels in the US and they will continue with expansionary monetary policy for as long as it’s necessary to see that full employment and to see robust growth in the economy. So something drastic would be a move away from that stance.

On what could lead to a weakening of the rand: 

If they come out and they say that as far as they’re concerned, employment is sufficient – at really good levels – they’re happy and starting to get unhappy with inflation that doesn’t look as transitory as that they initially thought, and that they need to move a lot quicker on their tapering, on buying back of liquidity out of the markets and increase interest rates. That would be the dramatic move – if they were to bring interest rate increases forward from what they anticipate as end of 2023, most probably into late 2022, early 2023. That would be very dramatic. It would cause a major move in the dollar. We would see the dollar index jump significantly to higher levels and that would weaken the rand considerably, and we will breach the R15 levels.

In that scenario, it will breach the R15 levels and it will remain above the R15 levels because that’s the kind of scenario where the dollar index would go a lot stronger. You will have a very negative impact on emerging markets, an outflow of a lot of money out of the emerging market space into the Americas, and that would breach the R15 [levels and] stay above the R15 [levels] for a considerable amount of time.

On the extent to which the rand is affected by local data: 

[I’m] not going to say that nothing that happens domestically is not important, but I have often said that we are exposed – due to an open economy, due to being part of the international markets – to international trade. We are sort of at the vulnerability of what happens internationally, specifically with the dollar to the extent of about 70% of our flows.

On the impact of a new finance minister: 

It’s quite late in the financial year for the new finance minister to change the budget. It’s through parliament, it’s accepted, very little change is expected. So big change will only come in – and speculations surrounding that – the budget speech of next year. So I don’t expect any fireworks at all. But, you know, Mr Ramaphosa said, watch this space. And in terms of the Treasury and a new finance ministry when we get closer to the budget next year, watch this space. I think that’s where we could see some changes.

But I think at the end of the day, it’s probably a good thing that we have a new minister of finance. I think Mr Mboweni had sort of lost a little bit of interest. He became a bit dated with his, and I don’t want to be nasty, but with his recipes in his cooking classes on Twitter. He had always said that he does not want to be in that position anymore. Now, when somebody doesn’t want to be in a position anymore, then I don’t think that the position actually gets the attention that it should be getting. So I think it was time for a change. And I think in terms of what was available, Godongwana is actually quite a good choice. He’s made good vocal sounds at the beginning of the year so let’s see how this plays out. But I think it’s a good thing.

On the impact of Covid and the risk of further lockdowns:

Well, we just have to look at the oil price. Oil price [is] slightly below the 70 and the reason behind that is concern about demand for fuel, demand for oil as Covid-19 plays a little bit of havoc throughout the world with economies as well. So I do not think that we’ll go into serious level five-type lockdowns. We might see smaller lockdowns in between. Certain countries [are] certainly a lot more strict, and I’m referring to Australia, New Zealand, etc. Those [are] very, very strict and very, very quick to react. When I look at the Europeans and I look at the Americas, I don’t think we’re in for serious level five lockdowns. Their vaccination rates are fairly high and I think the one that more and more starts playing out is, how do the hospitals look, and how do the death rates look, and that’s reasonable at this stage, hence I don’t think we’ll go into serious lockdowns.

Obviously, in South Africa, that’s a bit of a negative situation at the moment. Our vaccination rates are still relatively low last week, and I think a lot of our viewers and listeners would be aware of the controversial videos that were spread around the country and people looking at that. That has set us back a little bit because it puts people more on the backfoot of actually going into the vaccination centres and getting vaccinated. But once again, I think we [are] through our winter season for now or the worst of it. One or two provinces – referring to Western Cape and KwaZulu-Natal – still firmly in the grip of a third wave, but I think that would soon also dissipate to lower levels of infection rates. So also, here, I don’t think our lockdowns would continue indefinitely going forward. So still bodes well for economic growth.

On commodity strength influencing the rand:  

Well, we flattened out a little bit. The commodity strength was, specifically in the beginning of the year, a very big factor. Since then, prices have flattened out a little bit and slightly lower demand because of Covid-19 concerns, etc., all over the world. But it was expected, you know, nothing can continue at the same path of growth as it did in the beginning of the year. But it’s still at high levels. It’s still a commodity boom, just at slightly flattened-out levels, but still benefiting the country hugely. As we go into the end of the third and fourth quarter, we must remember that that’s also very good periods for our agricultural exports. Just yesterday, I’ve read about the fantastic maize crop that’s expected and it’s expected that the export levels of agricultural products in the third and fourth quarter would actually outstrip the exports of 2020. So that would aid what we lose on the commodity side. That would sort of bode well for that. So I still foresee fantastic trade balance figures, good surplus figures, and terms of trade for South Africa, still very much on the up and on the positive, aiding the currency at this stage.

On whether the rioting and looting in KZN will still affect the rand: 

I think it’s expected that our growth figures for the second quarter and also the third quarter would be slightly lower than what was expected. I think that’s kind of built into currency and forecasts, etc. So I don’t think that when the figures actually get released as we go forward, it would have a further dramatic negative impact unless it is a lot worse than what was expected. But I do not foresee that. Similarly, I do not foresee that the FOMC is going to give us a shock, hence me saying that in the short term we [will] stay within a trading range [of] R14.50, R14.90. Very happy medium at this stage.

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