South African Rand Rallies Back from Brink as GDP Surprises and Dollar Folds

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• GBP/ZAR spot rate at time of writing: 21.35
• Bank transfer rate (indicative guide): 20.60-20.75
• FX specialist providers (indicative guide): 21.03-2.20
• More information on FX specialist rates here

The Rand rallied back from the brink of a technical precipice Tuesday as theU.S. Dollar appeared to fold across the board and South Africa's economy surprised on the upside of expectations for the final-quarter.

GDP rose at a quarterly pace of 6.3% in the final months of 2020, Statistics South Africa figures suggest, when economists looked for only a 5% increase. The stronger-than-expected rebound means the economy contracted by an annualised -4.1%, better than expectations for a -4.6% decline.

"The annual real GDP growth rate of -7,0% in 2020 was primarily led by decreases in manufacturing," Statistics South Africa said, noting a a punishingly high contraction for the year overall. 

The strongest pace of recovery was observed in the manufacturing industry where output rose 21.4% last quarter, adding 2.4% to overall GDP, while the construction sector rebounded 11.4%.

Other top recoverers included trade, catering and accomodation industries in a quarter where the economy had largely reopened from 'lockdown.'

Those sectors however, were also among the worst impacted by the national shutdown used to contain the coronavirus last year so Tuesday's high growth rates are likely explained as much by statistical 'base effects' as anything else. The full announcement can be found here.

"The rand is likely to remain volatile this year," says Annabel Bishop, chief economist at Investec. "Rising US yields reduce appetite for EM assets."

South Africa's economy still faces a long road to recovery although with restrictions on activity eased and coronavirus vaccines beginning to become available in February hopes are that last quarter's rebound in GDP will be followed by further recuperation. But if the path for the economy is to be bumpy, the Rand faces an outright rocky road after a sell-off in U.S. and other developed market government bonds took the cost of borrowing over 10-years and more back to pre-pandemic levels. 

Above: USD/ZAR shown at 15-minute intervals alongside Pound-to-Rand rate (black line).

"Watch the US treasury market for a sense of whether the yield rise and volatility is set to continue or calm for a while, as it is the most important driver of market volatility," says Steen Jakobsen, chief investment officer at Saxo Bank. "The US treasury is set to auction 3-year notes today, likely somewhat less pivotal for the overall impression of the strength/weakness of the market than the 10-year auction tomorrow and a 30-year T-Bond auction on Thursday."

The earlier rise in U.S. financing costs for developed world governments spilled into other markets including those for developing economy bonds, global stocks and commodities, leading to a punishing bout of profit-taking for many currencies along the way. The Rand would be vulnerable if selling pressures return, although emerging markets rallied on Tuesday as bond yields headed for their first daily decline in five and the safe-haven U.S. Dollar fell across the board following a two-week rally.

"Over the past six months ZAR has been a large beneficiary of the recovery trade, given its positive terms of trade shock and gearing to the global cycle. However, as we have previously highlighted, ZAR has become increasingly sensitive to moves in US real yields. This can leave the currency particularly susceptible to bouts of weakness in the current environments," says Anezka Christovova, an analyst at J.P. Morgan. 

USD/ZAR had fallen from near 15.50 to 15.32, pulling the Pound-to-Rand rate with it, although the South African currency had previously fallen to the edge of a technical precipice that would risk aughuring a trend reversal if cross on a daily closing basis, according to some analysts. Technical analysts at Commerzbank wrote this week that a USD/ZAR rise above 15.66 would pave the way for a rally back above 16.0 and indicated the Rand is expected to struggle to push the Dollar past 14.5052 in the short-term.

"USD/ZAR’s strong recovery from the February low at 14.3952 has taken it back towards the January high at 15.6645. A rise above this high would make us bullish and would lead us to target the 200 day moving average and the September low at 16.0580 [thin black line on the below chart]," writes Commerzbank's Axel Rudolph in a Monday research briefing. "Good support below the current March low at 14.8578 can be found between the 14.5052/3952 December-to-February lows."

Above: USD/ZAR shown at 15-minute intervals with Pound-to-Rand rate (black line). Thin black line denotes 200-day average.