South African Rand’s Strength and Resilience Could Persist for While Yet

- ZAR outperforms on route to trio of weekly gains
- Nears June highs after strong data & USD retreat
- As incoming commodity dividends bolster outlook

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The Rand remained the market’s outperformer ahead of the weekend following a show of strength and resilience that could be set to persist for some time yet as it reaps the rewards of the commodity price recovery.

South Africa’s Rand outpaced all developed and emerging economy counterparts when nearing three-month highs against the Dollar and Pound on Friday after being lifted throughout the week by a cocktail of domestic as well as international tailwinds.

A nascent and ongoing retreat by the Dollar proved supportive of many currencies in the second half of the week but the Rand’s standout performance owes itself to domestic economic data that once again advertised the improved fundamental value of the South African unit.

“We’ve seen a massive outperformance by the Rand relative to other currencies this week. The Rand has strengthened just under two and a half percent over the past five days,” says Matthew Shaw, a foreign exchange trader at Rand Merchant Bank.

“We had the largest ever South African current account balance which has helped the mighty Rand strengthen back close to the 14 handle,” Shaw explains in a Friday podcast from Cape Town.

Instrumental in cultivating the Rand’s lead over other currencies was Thursday’s second quarter reading of the national current account balance from Statistics South Africa, which showed the country’s balance of payments surplus rising to a record high of more than five percent of GDP.

Above: USD/ZAR, GBP/ZAR and U.S. Dollar Index shown at hourly intervals. Gap between ZAR exchange rates and USD index reflects burgeoning outperformance of the Rand.

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The improved balance implies among other things a lesser need to draw in international capital in order for the Rand to remain supported, and is something that has a positive impact on theoretical measures of fundamental value for the currency.

The single largest contributor to the 343BN Rand surplus was a sharp rise in the international trade surplus resulting from strong export growth that was aided significantly by this year’s increases in metals prices.

“External tailwinds remain a strong advantage to net trade,” says Jeffrey Schulz, an economist at BNP Paribas. “We expect a 3.8% of GDP current account surplus in 2021, a post-democracy high. Underlying inflation remains benign, helped by suppressed wage growth and a stronger ZAR.”

Commodity prices of all kinds have surged in 2021 and although this is at least partly due to earlier optimism about the global economic outlook, there is also a significant body of research out there suggesting that central bank monetary policies have also very likely been at play.

Low interest rates, quantitative easing and resulting growth in central bank balance sheets are among the factors that are known to lift commodity prices, and especially following periods of global economic crisis.

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Such periods tend to see large numbers of major central banks stimulating their economies all at the same time, with strong impacts on commodities.

To the extent that these factors are likely to remain in place over the coming months, the Rand’s strength and resilience could also be set to endure.

There’s plenty of reason for thinking these central bank factors could remain in place too including policy guidance provided directly by the Federal Reserve, European Central Bank and others, all of which suggests that quantitative easing and low interest rate policies are likely to remain in place in at least some form until well into 2022.

“Commodity prices are likely to appreciate under these circumstances, leading the central banks of commodity currencies to tighten in advance of G3,” says Geoff Kendrick, head of emerging market FX research at Standard Chartered.

“Since 20 August, the USD has experienced its biggest sustained loss since late April but is still 1.4% higher than at the beginning of the year. The drop is linked to Fed Chair Powell’s lack of tapering urgency and a stabilisation of COVID concerns, in our view,” Kendrick says.

Above: USD/ZAR, GBP/ZAR and U.S. Dollar Index shown at daily intervals. Gap between ZAR exchange rates and USD index reflects burgeoning outperformance of the Rand.