Why the rand is more likely to strengthen from its current level

Ryan Booysen, MD, DG Capital Forex

Although the rand briefly dipped below the psychologically significant R15.00/$ level earlier in November, it has largely trended weaker during the month as the local unit takes its cue from the fraught Turkish Lira. Turkey, for its part, has cut interest rates contrary to the current tightening stance being taken by the rest of the globe.

As one of the most traded emerging market currencies, the rand will always be first in line to suffer when volatility takes hold. Add to that our tenuous fiscal position and the rand is a sitting duck. On Thursday 25 November, this came to the fore when the rand slumped more than 2% in a matter of hours following the shock announcement of the Omicron Covid-19 variant being present in Southern Africa. The currency drifted a further 0.5% lower before clawing back some of its losses to settle around 16.12.

However, all of the bad news is currently priced into the value of the rand. Nothing much is known about the Omicron variant and so the worst assumptions have been made and it has been labelled as a “variant of concern” by the World Health Organization. As yet unknown is the efficacy of the various vaccines against the Omicron variant or its infection rate. Many countries swung into action on Thursday and over the weekend shutting their doors to travellers from Southern Africa and halting flights to and from the nations. And when the flights restart, quarantine and other precautionary measures will be in place.

The globe is clearly prepared for the worst news to emerge regarding the new variant. But if it is less dangerous than feared, this will be likely to prompt a positive reaction in the rand meaning that we could have a stronger, rather than weaker, currency in the near term. There is more upside potential at this stage than downside potential.

The latest MPC meeting ended with a 25-basis point rise in the repo rate and, while this is unlikely to impact on inflation, it shows intent and will help to stabilise the currency on the margin. It is also helping the carry trade – the rand is third in terms of carry trade attractiveness at present – and buys goodwill in the market. We can expect to see monetary policy continue to move in a more hawkish direction, albeit at a gradual pace, which is again supportive of the currency.

Furthermore, our terms of trade are good and commodity prices continue to remain at elevated levels. These factors, too, will help to create a base of support for the local unit.

All-in-all, this gives us reason to believe that the rand is likely to show another bout of strength, particularly if the Omicron variant is shown to be anything less than current hyperbole being applied to it.