South African Rand Can Hold Recent Gains, Analysts Say, as Investors Look Beyond Coronavirus 

- ZAR builds gains over USD and GBP in trigger happy market. 
- As SA and others relax lockdown and investors eye recovery.
- USD/ZAR heads for 16.99-17.17 as GBP/ZAR slides further.
- Coronavirus hotspots, U.S.-China tensions both risks to ZAR.

Image © Government of South Africa, reproduced under CC licensing

• GBP/ZAR spot rate at time of publication: 21.42
• Bank transfer rates (indicative): 20.67-20.82
• FX specialist rates (indicative): 21.10-21.23 >> More information

The Rand extended its advance on the Dollar and Pound Tuesday as investors eyed the greener grass on the other side of the coronavirus pasture and analysts say the South African currency can hold onto its recently recovered turf.

South Africa's Rand rose against all major currencies and every one emerging market rival except the Mexican Peso as investors shrugged off mounting tensions between the U.S. and China, to celebrate a steady unlocking of the dometic as well as global economies. 

Countries including South Africa, Japan, the U.S. and even the UK have either eased 'lockdown' restrictions this week or set out plans to do so, offering a further glimpse of what might eventually resemble economic normality. 

This lifted risk assets and gave a further shot in the arm to a Rand that was lifted sharply last week by the South African Reserve Bank (SARB) when it cut the cash rate by 50 basis points to 3.75% but also delivered a sop to investors. 

"The cut was widely expected and was the reason why the Rand did not react to the announcement. However, the comments made by the Reserve Bank Governor stated that the Central Bank would not likely cut rates as aggressively in the future, bought a hawkish tone to the markets. This is good news for the investors looking for yield as yield is becoming a scarce commodity in the world of late. This would have given the Rand a little shot in the arm," says Andre Botha, a senior dealer at Treasury One. "The other reason that the Rand is on the front foot is that the world is looking a little rosier, with more economies opening up after their respective lockdowns."

The Rand was higher against most rivals Tuesday but was also up substantially against all barring the Mexican Peso and Brazilian Real for the last week too, Pound Sterling Live data shows, after having risen nearly 5% against every major currency except the Australian Dollar and Norwegian Krone. Gains over the latter two were 3.97% and 3.59% respectively, although the South African unit rose by equally large amounts over many of its emerging world rivals too.

Above: Pound-to-Rand rate shown at daily intervals alongside USD/ZAR (black line).

South African government bond yields offered investors some of the highest 'real' or inflation adjusted returns in the world before earlier economic hardship and the unprecedented damage done by measures used to contain the coronavirus prompted -2.75% worth of interest rate cuts from the SARB.

Those rate cuts have converted positive real returns into negative real interest rates for South African savers and international investors alike, although Governor Kganyago's comments about aggressive policy action may now have put a floor under the South African bond market and currency. Last week's cut took the South African Rand back above a key resistance level against the Dollar and has all but killed off any inclination that Sterling might've had to push the Pound-to-Rand rate toward new highs.

Botha says the Rand has "shifted bands and will most likely trade in the broad range of R17.50/R18.50" so long as investors view the global economic glass as half-full rather than half-empty, although he's also warned that "sentiment is also fickle" so the market mood could change with the drop of a hat.

"The Rand continues to strengthen as markets are building up optimism for quicker recovery in some key geographic areas, notably some commodity importers, benefiting the commodity nature of the domestic currency," says Annabel Bishop, chief economist at Investec. "The global market sentiment lift driving the rand is still prone to risks however....Countries ahead in the easing of restrictions are seeing some optimism on their future outlooks, but a deep severe recession globally will not be avoided."

Above: USD/ZAR rate shown at weekly intervals with Fibonacci retracements of 2016 downtrend.

"While the rand is trading on the brink of USDZAR oversold levels from an RSI point of view, the rand continues to receive strong support from the market. We, therefore, close the trade at 17.45 with a loss of 2.6%," says Cristian Maggio, head of emerging market strategy at TD Securities, referring to May 21 bet on a USD/ZAR increase from 17.92. "We will not be looking to re-enter the position anytime soon despite our bearish rand forecast for this year, unless market conditions swiftly change in a more bearish direction."

USD/ZAR fell back below its 55-day moving-average at 18.08, the round number of 18 and the 100% Fibonacci retracement of January 2016's downtrend at 17.83 during last week's rally by the Rand.

Those had all provided technical support to the exchange rate since being overcome in March and some analysts see that area offering a form of resistance to the exchange rate upon any fresh weakness in the Rand. 

Analysts at Commerzbank said Monday that USD/ZAR formed a technical top at its all-time high of 19.34 in early April and that it should now fall to between 16.99 and 17.17 over the coming days where it's seen stabilising, although they did also say the South African unit would remain vulnerable to fresh bouts of weakness unless it can push USD/ZAR below 16.99. The fall in the USD/ZAR rate and weakness in Sterling have seen the Pound-to-Rand rate unravel. 

"While this support underpins on a daily chart closing basis, overall upside pressure should retain the upper hand," says Commerzbank's Axel Rudolph, of 16.99-to-17.17. "Were a currently unexpected rise above the 19.3418 April peak to ensue, the minor psychological 20.0000 mark and a daily horizontal 0.25 x 3 Point & Figure upside target at 20.7500 would be in focus. This is currently not our preferred scenario and instead further weakness is likely."

Above: Pound-to-Rand rate shown at weekly intervals with Fibonacci retracements of 2016 downtrend.

The Pound-to-Rand rate fell back beneath the 61.8% Fibonacci retracement of its own January 2016 downtrend at 21.84 last week after repeatedly failing to over come the 78.6% retracement at 23.57 during the March fire sale of risk assets. That exchange rate is effectively an amalgamation of USD/ZAR and GBP/USD so if the Rand gains further over the Dollar in the weeks ahead, the Pound-to-Rand rate would be liable for more losses without a GBP/USD recovery that matches the fall in USD/ZAR.

Tuesday's gains by the Rand came as South African prepares to move from level four to level three of its five-stage traffic light system that determines the severity of restrictions imposed on daily life, with the change coming into effect from June 01. The decision will see most sectors of the economy reopen but comes with the coronavirus epidemiological curve still in the process of flattening and so might risk triggering a second wave of infections that could necessitate a return to lockdown later on. 

Metros including Johannesburg and Cape Town have been designated coronavirus hotspots, defined as somewhere with more than five infections per 100k people, although restrictions will still be eased in those areas. The prospect of a second wave of infections that arises from an early 'lockdown' exit is a threat to the Rand and so too is the potential for the U.S. and China to come to blows in the weeks ahead, which might spoil investor appetite for emerging market currencies and other risk assets.