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- Facing strong local and global headwinds, the rand strengthened to its strongest level since September 18 on Tuesday.
- Less than a month ago, it was more than a rand weaker against the dollar.
- But its winning streak could come to an end if Wednesday’s medium-term budget paints a bleaker outlook than expected.
- For more articles, visit www.BusinessInsider.co.za.
In a surprising turn of events, the rand reached its highest level since September 18 on Tuesday.
It last traded at R16.12 after strengthening to R16.09 / $ earlier in the day. Less than a month ago, it was trading at R17.18.
The dollar / rand exchange rate. Source: XE
It has now strengthened 3% in a week, an unexpected development, ahead of what will be a bleak medium-term budget, presented by Finance Minister Tito Mboweni on Wednesday. The government faces a sharp reduction in tax revenue and a struggling economy, while its debt has exploded. Mboweni will have to come up with realistic plans for heavy spending cuts to keep the market happy. Even then, if it reveals a worse-than-expected fiscal outlook, markets will freak out.
Meanwhile, Bloomberg reports that South Africa’s talks with the World Bank about a $ 2 billion loan have stalled. The bank is reportedly demanding that South Africa cut its wage bill and agrees that the loan money will not be used to bail out state-owned companies. Negotiations started in April.
The rand is also supposed to face headwinds from abroad, with global markets under pressure as investors worry about new locks in Europe, record daily cases of Covid-19 in the US, as well as the lack of a new economic stimulus plan in that country. Typically, such a cocktail of uncertainty would cause investors to take a more risk-averse stance and dump riskier assets like the rand.
However, this did not happen on Tuesday, and the rand also took advantage of the sharp decline in its emerging market peer, the Turkish lira, in stride. The lira fell to a record low amid a political dispute with France. France withdrew its ambassador from Turkey on Sunday after Turkish President Recep Tayyip Erdogan suggested that his French counterpart Emmanuel Macron needed a mental health check. Erdogan’s comments came after Macron criticized Muslim communities in France following the Oct. 16 murder of a school teacher who had shown his class cartoons mocking the prophet Muhammad.
The rand gained against major currencies on Tuesday, last trading at R21.04 / pound and R19.09 / euro.
But your current winning streak is not a one-way bet.
In the short term, its trajectory will be heavily influenced by how markets react to Wednesday’s mid-term budget speech, says Lukman Otunuga, senior research analyst at FXTM. If South Africa’s fiscal deficit were to rise more than was projected in the June coronavirus emergency budget, the rand could be hit a bit.
Independent analyst Johann Biermann believes the rand will face choppy trading towards the end of the year. In addition to the uncertainty about South Africa’s fiscal conundrum, the new lockdowns in Europe could even be followed by a lockdown of its own in the US, if Democratic candidate Joe Biden, who seeks to take a more aggressive stance to contain the virus, win the elections.
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