South African Rand Rally Stalls Near 2020 Highs as Restrictions Place Question Mark Over Recovery

- ZAR rally stalls after new virus strain prompts restrictions.  
- Faster spread & vaccine wait time threaten SA recovery.
- USD/ZAR stuck above 14.50 as GBP/ZAR turns higher.

Image © Adobe Images

• GBP/ZAR spot rate at time of writing: 19.86
• Bank transfer rate (indicative guide): 19.18-19.32
• FX specialist providers (indicative guide): 19.58-19.74
• More information on FX specialist rates here

The South African Rand was in retreat Wednesday after stalling near to 2020 highs against the Dollar earlier this week when new coronavirus-inspired curbs on activity placed a question market over a fledgling economic recovery. 

South Africa's Rand was lower against almost all major currencies as well as many emerging market counterparts despite an evidently upbeat mood among investors elsewhere in the world, continuing the week's trend of underperformance. 

Stock markets and many commodity prices were higher on Wednesday while the U.S. Dollar was lower almost across the board, although momentum had ebbed from the Rand.This is after USD/ZAR stalled near 2020 lows around 14.50 on Monday as investors contemplated what new restrictions will mean for the country's fragile economy.

"The number of new coronavirus infections is climbing at an unprecedented rate," President Cyril Ramaphosa said when announcing a move to "an adjusted Level 3," of a five-stage alert system under which indoor and outdoor gatherings have been banned, a night time curfew has been imposed and mask wearing is mandatory in public.

Supposedly non-essential businesses are required to close from 20:00 while the "sale and transportation" of alcohol is banned, with South Africans facing fines and possible imprisonment for noncompliance. The armed forces have been deployed to help enforce the measures. 

Above: USD/ZAR shown at daily intervals. 

"The good news is that we know that Pfizer and Moderna can change their vaccines within four to six weeks in the event the vaccines are ineffective," says Allan von Mehren, chief analyst at Danske Bank. "While a vaccine will not stop it being a long winter with many restrictions, we believe the vaccination process limits the need for restrictions next autumn. This is one reason we are more upbeat on the 2021 macro outlook."

South African lawmakers were quick to enable businesses to reopen after this year's earlier 'lockdown' and have often professed a reluctance to impose any curbs on activity at all due to economy's fragile state and the troubled public finances, although theres's a risk that the new coronavirus strain changes this. In the UK the government has already stated that a faster spread of infection will require more stringent restrictions until a vaccine can be made available at the national level. 

{wbamp-hide start}{wbamp-hide end}{wbamp-show start}{wbamp-show end}

"We are part of the first group of countries that will receive an allocation of vaccines from COVAX. We have been advised that we should expect the vaccines in the second quarter of 2021," Ramaphosa said on Monday. "As a country we need to build a strong partnership between the government and business sector to augment the resources required in financing the additional vaccines necessary to achieve herd immunity."

One problem for the Rand is that with every day the economy remains impeded by mandatory closures of businesses and social distancing requirements, the burden on the already-stretched public purse will grow., which could eventually threaten appetite for the South African currency.  

Above: USD/ZAR shown at weekly intervals Fibonacci retracements of 2018 uptrend.  

"Financing has gone relatively smoothly so far in 2020, thanks to loans from multilateral organisations and the ability of local institutions to replace foreigners’ lessening appetite. In 2021, the financing of the government sector may become difficul," says Paul Mackel, head of emerging market FX research at HSBC. "We foresee a scenario where the SARB may have to expand its bond purchases significantly, which is inherently ZAR-negative."

HSBC forecasts USD/ZAR return to 15.0 over the coming days before rising back to 17.0 in 2021, both being shifts that could already be underway. USD/ZAR has fallen by -12% in the final quarter but was struggling even before this week's restrictions to push below 14.50, which coincides with a major multi-year technical support line.

Furthermore, and with USD/ZAR stalled near its 2020 lows, the Pound-to-Rand exchange rate has been able to recover alongside the main Sterling exchange rate GBP/USD, which has been boosted since the UK and EU reached a Brexit trade agreement last week. 

The agreement cleared its first parliamentary hurdle in London on Wednesday and is expected to be ratified in time for the expiry of the Brexit transition period at 23:50 on December 31, which will avert the trade cliffedge that financial markets had often feared in the years since the referendum. 

Above: Pound-to-Rand rate shown at daily intervals.