Why is the South African Rand so weak?

The rand has been on a downtrend for a while now; it was overvalued for a start but political uncertainty has really triggered quite an aggressive depreciation in recent months. Uprisings have sprung up across the country, with the death toll reaching fifty. Mineworkers are particularly prominent within the uprisings, with demands for wage increases the key driver of national anger.

President Zuma is under huge amounts of pressure and will struggle to be re-elected; latest approval rating suggests only 32% support the man in charge. Zuma has given himself a 5.5% pay increase recently – so it’s no surprise that he is under the cosh.

Naturally, this has limited the productivity of the country’s key economic growth contributors, such as its iron ore, platinum, trucking, wine and fruit industries. This is having a material impact on South African growth, GDP expectations have been repeatedly downgraded by the South African Reserve Bank. The outlook is pretty bleak too, with inflation high, unemployment likely to rise and global demand for South African exports likely to decline (particularly from the eurozone).

Unsurprisingly, investor confidence has taken a major hit; the use of armoured vehicles, rubber bullets and tear gas is not conducive to rampant commerce. With investors making for the exit, the rand has plumbed fresh multi-year lows across the exchange rates and with no real sign of the social and political unrest easing up, the rand is likely to remain on its downtrend for at least the next six months to a year. 

Richard Driver

Currency Analyst 

Caxton FX

Greek coalition talks collapse and prospect of new elections hurts euro

Sterling remains flavor of the month
Sterling has climbed by a further three cents against the euro in the past fortnight. Sterling’s progress against commodity currencies such as the AUD, NZD, CAD and ZAR has been ever more impressive in the past few months. Sterling has climbed by over 10% against the ZAR and NZD since mid-Feb, while it has advanced against the ZAR by the same margin since mid-March.

Sterling’s safe-haven status is behind its demand and this is not something we see disappearing any time soon. Also helping the pound was last week’s MPC vote against further quantitative easing. Whilst there will be some nerves surrounding the voting pattern (to be revealed by the MPC minutes next week), stubbornly high inflation seems to be of greater concern to the policymakers (thus making more QE harder to justify). Tomorrow’s Quarterly Inflation Report from the Bank of England will be highly relevant in this regard. A firmer inflation outlook is likely to be provided, which again should be broadly supportive of the pound.

Euro suffers from lack of Greek coalition agreement

Global investor confidence and risk appetite has taken a turn for the worse in the past fortnight, driven by concerns over Greece. Since the failure of the ruling Greek coalition to maintain sufficient votes at its recent election, major doubts have arisen as to whether Greece will remain within the euro. Coalition talks have collapsed and another election will be held in mid-June, which means the current uncertainty will be extended. As a result, Spanish and Italian bond yields are on the rise, with the former’s 10-year debt yields looking particularly alarming at fresh 2012 highs over 6.25%.

Should an anti-austerity coalition government surface from the current mess, then Greek bailout funds would be withheld, leading to default and a probable Greek breakaway. The knock-on effects in the eurozone and the global financial system as a whole are expected to be more drastic than those of Lehman’s collapse. It is no surprise then, that the euro has suffered a significant decline, with perceived safer-currencies such as sterling and the US dollar filling the void.

GDP data out of the eurozone was very mixed indeed this morning. Italy broadly stuck to the script by contracting by 0.8% in Q1 of this year, while French growth remained stagnant. However, the German economy grew by 0.5% in Q1, which helped the eurozone economy as a whole avoid a technical recession by posting a 0.0% GDP figure. This development has given the euro a mild boost today but with so much austerity still to be delivered in the eurozone and today’s forward-looking economic sentiment surveys showing a fairly sharp decline, eurozone growth is highly likely to return to negative territory this year.

Sterling is trading at €1.25 today, which represents near enough a three and a half year high. We are not calling a top to this pair’s ascent just yet either, with nerves surrounding Greece likely to deteriorate over the coming weeks. In risk averse conditions, the pound has understandably traded a little softer against the US dollar, coming off its highs of $1.63 to trade two and a half cents lower today. This pair could well test the $1.60 level fairly soon, though we are not anticipating any major collapse.

End of week forecast

GBP / EUR 1.26

GBP / USD 1.5950

EUR / USD 1.27

GBP / AUD 1.61

Sterling v South African Rand Outlook

The South African rand has been the most volatile emerging market currency this year and the GBP/ZAR recent fluctuations have been reflective of this. The appreciation of the rand in the past three months has been largely thanks to the return of risk appetite, which is attributable to growing confidence in the global economic recovery. This confidence has faltered of late but should be a prominent feature looking forward.
After reaching a high of 11.80 in mid-February, the GBP/ZAR declined to its current trading level of 11.16.

The rate would be lower but for the recent period of risk aversion triggered by concerns that Greece will need to restructure its debt. These peripheral debt fears coincided with a slump in the commodity markets, which has seen the price of gold from $1,540/oz to under 1500/oz in the past fortnight. South Africa is a major exporter of precious metals and other raw materials and its economy benefits greatly from higher prices, and its depreciation is a logical consequence of commodity slides.

Risk appetite is slowly but surely returning at present and based on the premise that eurozone leaders are able to hammer out some sort of palatable solution to the Greek debt situation in the near future, the rand should be able to regain ground lost in recent sessions. Of course, a bounce in commodity is important as well, but even with the recent slide in mind, commodity prices remain at elevated levels. Rand investors will hope the recent commodity decline is a correction, rather than a genuine change in trend.

Central bank policy has been a major driver of the currency markets this year, and the South African Reserve Bank (SARB) boasts a 5.5% interest rate, which compares very favourably with the Bank of England’s 0.5% base rate. So when confidence is high as it has been for long periods this year, we have seen and will continue to see investors chase higher-yielding currencies such as the rand.

However with the bank having kept rates on hold at its last meeting, the market is somewhat pessimistic as to further SARB monetary tightening in the near and medium-term, which could limit the rand’s appeal somewhat moving forward. In addition, South African headline inflation hit 4.2% last month, which was below expectations of 4.4% and well within the official 3-6% target. South African growth prospects have also been downgraded of late as its recovery slows up, with high unemployment a particular issue.

Market sentiment towards the UK economy has weighed on sterling in recent months and with few signs of near-term improvement on this front, sterling is likely to remain out of favour for months to come. Despite high UK inflation up at 4.5%, the MPC is reluctant to impose stricter lending costs on the British economy with when a double dip recession is such a genuine threat.

Sterling look set to underperform for several months to come and based on the assumption that risk appetite will return with a good degree of strength and commodities do not suffer another major decline, we see sterling weakening against the rand in the near-term. One important factor will be the behaviour of the SARB in the spot markets; the central bank has attempted to limit the rand’s appreciation by buying up foreign exchange. This sort of intervention all but rules out any extreme decline in the GBP/ZAR pair. Nevertheless, GBP/ZAR may head down towards 11.00 and possibly below this benchmark before the prospect of BoE rate hikes gives sterling a boost.

Richard Driver
Analyst – Caxton FX


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Sterling falls to 2 and a half year low against the rand following British budget

The pound fell sharply across the board this afternoon, and dropped to a 2 and a half year low against the South African rand, as the market responded to the bleak economic outlook for the UK detailed in Chancellor Alistair Darling’s budget report. The pound fell as low as 12.9796 for first time since August 2006 as market sentiment turned against sterling.