South African Rand Rallies after Restrictions Eased but Upside Limited Short-term

- ZAR outperforms after restrictions eased, global markets rally.
- Reopening bars and beaches offer SA's economy shot in arm.
- Global rally helps lift ZAR, but analysts warn of limited upside.

Image © Government of South Africa, reproduced under CC licensing

• GBP/ZAR spot rate at time of writing: 20.49
• Bank transfer rate (indicative guide): 19.77-19.92
• FX specialist providers (indicative guide): 20.18-20.35
• More information on FX specialist rates here

The Rand rallied Tuesday after President Cyril Ramaphosa eased 'lockdown' restrictions and as investors welcomed progress in Washington toward another package, although imminent risks associated with the looming budget argue for caution while analysts say that upside should be limited in the short-term.

South Africa's Rand was higher against all major developed and emerging market currencies as global stock and commodity markets recovered further from last week's losses, although it was aided by a domestic tailwind and fresh optimism about the prospect of another U.S. spending proposal winning sufficient support in Washington.

"Investors have accepted the fact that another stimulus package might not arrive as quickly as they initially hoped for, but see another long stalemate as unlikely, especially since Democrats could move forward with their plans without bipartisan support," says Milan Cutkovic, an analyst at Axi. "European equity markets are trading higher this morning, with the German index up 0.50 per cent on the day. Despite the recent market turbulence, the mood on Wall Street remains fairly upbeat. Strong gains in technology stocks lifted US markets and Asian shares followed Wall Street higher. Investors are eagerly waiting for the latest earnings figures from Amazon and Alphabet."

President Ramaphosa said Monday that South Africans will now be able to return to beaches and bars as curbs on social activity are reduced following a decline in the trend of new infections, although premeses will have to close from 22:00 and a curfew will remain in effect, albeit from a later time of 23:00.

Ramaphosa fired the starting pistol on phase one of South Africa's coronavirus vaccination program following the arrival of 1 million doses of the Covishield vaccine, which is the one designed by Astrazeneca and Oxford University, after its outsourced production by the Serum Institute of India.

"There does seem to be some light ahead – not only in our skies but in our fight against the pandemic and the long slog towards economic recovery," says Siobhan Redford, an economist at Rand Merchant Bank. "The President outlined government’s strategy for the roll out of the vaccine as well as highlighting the progress made in procuring vaccines. But by this time, the arrival of the vaccine was old news, and while it was good to be reminded of the roll-out plan as it currently stands, people were not tuned in for this."

RMB's John Cairns says event risk is high this coming week, not only because of the data calendar, but also nervousness in the equity markets. #RMBWeeklyUpdates pic.twitter.com/mWxrAcNztO

— Rand Merchant Bank (@RMBCIB) February 1, 2021

Healthcare workers, which are reported to number some 1.25 million, are first in line under a phase one rollout and preceding a second phase in which essential workers, people over 60 years, people with co-morbidities and those living in places such as nursing homes and hostels will all also be vaccinated.

A further 2 million doses are expected before the end of March with an additional 29 million coming from Johnson & Johnson and Pfizer before end-June, although with many requiring two doses per inoculation, it could be some time before the government gets around to all 58-odd million South Africans.

"The first good news is the arrival today of the vaccines. The second is that we have recorded our lowest daily increase in infections since the beginning of December last year. In fact, the average rate of new infections has been steadily coming down over the last three weeks, indicating that we have now passed the peak of the second wave," Ramaphosa said. "The average number of daily new infections has come down to almost half of what it was."  

 Above: USD/ZAR shown at 4-hour intervals alongside S&P 500 index futures (orange).

"Citi Economics and EM Strategy examined the vaccine situation amongst several other ongoing developments," says Kurran Tailor, an FX analyst at Citi. "The team notes that lack of vaccines relative to most other countries is likely to impede South Africa’s 2021 recovery, both directly and indirectly."

Eased restrictions could offer South Africa's economy a pickup in the coming weeks and months although upside for the currency could be limited ahead of the February 24 budget, which will see the latest deficit and debt-to-GDP forecasts unveiled following a tough few months for the domestic economy. 

The danger for the Rand is that forecasts of more borrowing, a higher deficit and rising debt pile see the date at which the country is expected to achieve a primary budget surplus pushed back again, which could lead to increased risks of further credit rating downgrades. 

"So far this quarter the rand averages R15.12/USD, drawing closer to R15.00/USD, although it could see marked weakness later this month after the release of South Africa’s 2021 Budget on significant further deterioration in the country’s public finances," says Annabel Bishop, chief economist at Investec. "The domestic currency remains volatile and is unlikely to lose any of its high sensitivity to shifting sentiment in global financial markets absent any real corrective measures in its ballooning debt projections." 

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

South Africa lost its last remaining investment grade rating following last year's budget, pushing it into the 'junk' part of the debt market, although any perceptions that further downgrades are likely in the months ahead could still weigh on the local currency and bond markets. 

As a result, and although the Rand had been lifted on Tuesday by improved international risk appetite, it could be likely to find that getting past its earlier high near 14.50 against the Dollar is a bridge too far at least in the short-term.

Technical analysts at Commerzbank see USD/ZAR range-trading between 14.50 and 15.66 over the coming days while Investec forecasts an average of 15.0 will prevail through much of 2021. GBP/ZAR is forecast to fall to 20.20 by quarter-end before recovering to 20.79 by end-June.

"Further range trading between the December low and January high at 14.5044/15.6645 is expected to be seen, though probably with a slight bearish slant," says Axel Rudolph, a senior technical analyst at Commerzbank. "Below the 14.7691/5044 recent lows lies the 14.4714/3890 area (200 week and 55 month moving averages) as well as the 2011-2021 uptrend line at 13.7519."  

 Source: Commerzbank.