Morning Brief – What goes down must not come up…

What goes down must not come up…

The case for a stronger South African Rand continues to grow in momentum. However, the spot (and indeed forward price) has been reluctant to follow. Why? First let’s make the case for a stronger Rand. Following municipal elections in South Africa, the risk of a major upset has largely passed. Despite the dwindling support for the ANC and notably low voter turnout, the worst-case risk priced into the election did not (or at least has not yet) materialise(d). This was a key political and socio-economic obstacle for the nation to pass in order for the Rand to correct from recent lows.

Subsequently at COP26, a big announcement was unveiled and the beneficiary was South Africa. 8.5 billion Dollars was promised to help end South Africa’s reliance on coal energy in the name of climate change. This deal is funded internationally providing a direct capital injection into South Africa. Load shedding is still commonplace in South Africa and whilst the $8.5bn is to allow South Africa to transition to more sustainable and eco-friendly methods of power output, it will inevitably provide cash which will begin to allow the burden of Eskom, as well as its failing and poorly maintained coal power stations, to become a problem of that past. Eskom and its debt have consistently been cited as a cause of the Rand’s ailments and the state-owned company finally has a taste of what it needs: money.

This month, the South African Reserve Bank caught the market off guard with a surprise rate hike. This followed a budget speech a few days earlier that was warmly welcomed by the market and considered to provide much needed support to the economy without compromising fiscal integrity. All of these factors did provide relief to the Rand in early November, however, the Rand subsequently lost ground once again down to year-to-date lows against the US Dollar.

The reason for this is the simultaneous threat that a rising Dollar presents to the SA economy and in turn the Rand. Due to the proportion of hard-debt in South Africa, a rising Dollar presents challenges to the Rand threatening fiscal sustainability and unwinding the potential upside of at least two of the Rand-positive arguments above (the rate hike and the promising budget). Given that the US Dollar is still showing little signs of being overbought despite a somewhat relentless rally, it may not be time to call a change of tides in the Rand just yet.

Discussion and Analysis by Charles Porter

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