Morning Brief – Thursday 9th

Waiting Game:

Voting has closed in South Africa’s national and provincial election, but it will take time to understand how the electorate expressed their will at the 22,924 polling stations across the nation. Results are scheduled to be released by May 11th and any exit or advanced polls are typically poor reflections of the subsequent result. The closely watched elections saw the Rand rally yesterday despite considerable volatility across its associated currency pairs.

It’s not abnormal for the Rand to rally moving into domestic elections, in fact, this position was presented as an expectation by the market analysts and pundits. However, solidifying that value and supporting a trend of Rand strength following the elections is highly unusual. Consider, for example, the last phase of so-called “Ramaphoria”. 

Although the leader was not directly elected by the public and rather came to power by consequence of a long-coming storm within his party, the change of political tone and leadership did closely resemble an election. The relief rally in anticipation and initial realisation of a new leader and political direction was considerable. However, the six months following the change saw the Rand weaken by some 35% against the US Dollar.

South Africans, international investors and interested onlookers alike will be focusing on a set of key variables. First off, how many people took to the polls to have their say? Never before in South African history have so many individuals registered to vote. However, it won’t be known for a couple of days exactly how many ballots were cast. Typically, the incumbent opposition, the centre-right Democratic Alliance, has demonstrated a stronger ability to galvanise its voters. Any waver in voter turnout should therefore be thought to limit the relative vote share of the ruling African National Congress. 

A poll released only two days before the ballot opened showed the ANC receiving just 53% of the vote; almost 10% shy of their realised 2014 vote share. Gauntlets have be thrown down in their dozens as to what ANC vote share would precipitate Rand strength, and what outcome would demonstrate political constraint and thereby weaken the South African currency. With median forecasts around the 56-57% mark, if the percentage of South Africans supporting the incumbent president approaches or exceeds 60%, expect at least short-term Rand strength. Conversely, should realised vote composition fall towards the 50th percentile, markets would expect a constrained polity and sell Rand in droves, lowering the price.

Trump’s condemnation of China yesterday evening, claiming that their leaders “broke the deal” that was being negotiated on trade has caused markets overnight to seek safety and eschew risk. Accordingly, the Rand trades weaker this morning alongside other emerging markets and equities.

Discussion and Analysis by Charles Porter

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