After drifting sideways for the better part of 2 weeks, the market finally moved out of its established ranges as the rand surprised many in the market and broke below the R14.20 level last week.
Below is the USD/ZAR graph reflecting the rand trading at Jan 2020 levels:
So what are the reasons for the rand performance?
Firstly, one of the key reasons the rand is trading at its strongest levels since January 2020 is the fact that other EM peers look horrible. In other EM countries like Turkey, Russia and Brazil, domestic problems outweigh any benefit of investing there. The US is looking to impose more sanctions on Russia, with restrictions to trading in sovereign debt. South Africa seems like a beacon, where yield is still prevalent in the current stormy pandemic sea. The market is unwilling to invest in other EM markets, which has been a shot in the local currency.
The second helping hand that the rand has received is from the weakening US dollar. We have seen the US dollar weaken to 1.20 against the Euro as the market is starting to believe that inflation will be transitory rather than a fixed agenda item in the US. We’ve seen the US treasury yields retreat back to the 1.55% markdown from their highs of only a couple of weeks ago. It is also interesting to note that the economic numbers out of the US have been beating expectations to the top side. However, this has done nothing for the US dollar, suggesting that the economic recovery has been fully priced into the market.
As we are in the doldrums of the middle month in terms of data releases, with an empty data cupboard for major market releases, it emphasises the movement of the US dollar to provide direction for the market.
We have seen the rand reacted favourably to the US dollar weakness, but we expect there to be some pullback in the rand as the move has been very aggressive, and it would not surprise us if, in a data light week, the rand consolidated a bit back to the R14.40 level. The rand has broken through some key technical levels, with some commentators calling for a test below R14.00, and while we believe that could occur, we think that a little bit of relief is in the offing.