The US Dollar’s advance in the last week has weighed upon the valuation of emerging market currencies that have a large and unstable burden of hard debt. The South African Rand has sold off against many of its peers as a result of this but has begun to find traction upon signs of an improving economic outlook. The Rand retains very little of its discount following the breakout of the pandemic, creating troubling technical dynamics for the Rand to appreciate further. However, the cyclical return of investors towards higher yielding currencies including the South African Rand could still prompt moderate gains for the currency later this year. Positive economic data this week has offered support to the currency.
On Tuesday the Rand appreciated by 1% versus the US Dollar to curb the rise in USDZAR over the last few weeks on the back of this data. The headline figure was compounded by quarterly statistics being annualised however, for South Africa to boast expansion rates of 6.3% has deservedly firmed up sentiment surrounding the Rand. Less attractive data came in the form of the year on year growth that demonstrated an annual contraction of 7%. Despite a hefty dent being made on the South African economy, the 7% decline in economic output was better than median forecasts meaning that the SA economy is larger than many had expected it to be at this point in time.
Expected to benefit from the cyclical rotation into higher yielding assets later in the year as the rebound from the pandemic takes hold, the better than expected positioning of the South African economy could exacerbate the gains to be expected later in the year. It is also true that the longer the Rand maintains its discount above pre-pandemic levels, the more South Africa will be able to leverage an export-driven recovery from the pandemic to its benefit. Balancing against the traction that the GDP data provided to the currency, condemnation of South Africa’s 2021 budget could limit growth later in the year. The lack of structure with respect to economic reform could undermine a sustainable recovery and limit the vigour behind the rebound in the currency. Critically, the budget gives little hope that South Africa could regain its status of investment grade on its local and hard currency debt following unanimous downgrade in March 2020.
Discussion and Analysis by Charles Porter