South African Rand Stabilising

• USD/ZAR, GBP/ZAR rallies almost entirely reversed
• As ZAR stabilises following Omicron-induced sell-off
• But still faces anxious wait for data on threat posed
• But early signs are positive, suggesting mild disease

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The Rand has emerged as an unlikely outperformer this week but now faces an anxious wait during which uncertainty about the threat posed by the newest strain of coronavirus could limit its scope for further appreciation.

South Africa’s Rand had substantially reversed late November’s declines against the Dollar and Pound by Tuesday following a strong start to open the new week, which saw it feature briefly as an outperformer of developed and emerging market currencies alike.

Driving Monday’s rebound was a report from Bloomberg News suggesting that European health ministers could reconsider recently imposed restrictions on travel to and from South Africa at a meeting on Tuesday, although this suggestion has since been denied.

These travel bans will devastate the economies of Southern Africa that are dependent on tourism. They go precisely against what was agreed at the G20 in Italy earlier this year when it was said we must open up travel so the tourism sector can recover.

— Cyril Ramaphosa 🇿🇦 (@CyrilRamaphosa) December 6, 2021

Meanwhile, and providing a further tailwind to risk assets was a decision from Beijing to cut commercial banks’ reserve requirement ratios by an amount equivalent to 0.5% of regulatory capital, the second such reduction of 2021, in an effort to curb a slowdown in the world’s second largest economy.

“Monday’s announcement came earlier than expected and soon after Premier Li Keqiang’s meeting with the IMF last Friday when he hinted of an RRR cut without specifying the timing. The move will help to shore up confidence,” says Ho Woei Chen, an economist at UOB Bank in Singapore.

Above: Pound-to-Rand exchange rate shown at 4-hour intervals alongside USD/ZAR.

• GBP/ZAR reference rates at publication:
  Spot: 21.07
• High street bank rates (indicative): 20.33-20.48
• Payment specialist rates (indicative): 20.88-20.96
• Find out about specialist rates, here
• Set up an exchange rate alert, here
• Book your ideal rate, here

The above combination combination helped pull USD/ZAR back beneath the 16.0 handle and weighed on the Pound-to-Rand exchange rate, which traded briefly beneath 21.00 during the Monday session in price action that completed a reversal of losses sustained when western countries hastily imposed restrictions on travel to and from South Africa following its detection of the newest mutated strain of the coronavirus.

“South Africa is the epicentre of Omicron worries, with its quickly rising number of new cases, but it also offers some optimism given that the number of new deaths and ICU occupancies remains range bound,” says Eimear Daly, an FX and emerging market macro strategist at Barclays.

“For the time being, the elevated uncertainty should continue to hinder any potential ZAR appreciation,” Daly said in a Monday research note.

While many countries including the UK and others in Europe have since confirmed that the new virus strain is already spreading within their borders, restrictions on travel to various parts of Africa have continued to be imposed.

Above: Investec foreign exchange forecasts.

These risk creating significant hardship for the economies concerned and are also likely to act as a constraint upon the South African Rand over the coming weeks and months, which are periods in which seasonal flows of tourists from across the world would typically benefit the currency.

“The exchange rate of the rand versus hard currencies typically strengthens from November, right up to February of the following year, from foreign tourists' rand purchases, while GDP experiences a lift from the hospitality, retail, tourism and other industries,” says Annabel Bishop, chief economist at Investec, writing in a Monday note to clients.

“It is likely that the domestic currency will struggle to make substantial gains into year end and today has only limped somewhat stronger,” Bishop said.

Very little is known for certain about the new and many times mutated strain of the coronavirus other than that it’s thought to spread much more rapidly than those variants in circulation previously, although U.S. chief medical adviser Anthony Fauci has told CNN that so far there “doesn’t appear to be a great deal of severity” to it.

Above: USD/ZAR shown at weekly intervals with Fibonacci retracements of 2020 fall indicating likely areas of resistance to Dollar strength. 50% Fibonacci retracement has so far curtailed USD/ZAR’s June-to-December rally.

Should it be confirmed by clinical studies that the new strain is a mild one, which could take weeks yet, then it would be a boon for South Africa and other countries with economies that are being jeopardised by travel restrictions, with possible knock-on implications for the Rand.

“SA’s 3Q21 GDP will be announced on Tuesday and the current account on Thursday. Both should have an impact on the rand and rates markets, but domestic news will be overshadowed by US CPI on Friday,” says Kim Silberman, a fixed income and currency analyst at Rand Merchant Bank.

“GDP is expected to show a 0.8% q/q contraction as covid’s third wave, riots and port troubles stunted the recovery. The current account should remain in surplus, although it is expected to narrow to 3.8% of GDP from 5.6% in 2Q21,” Silberman said in a Monday note to clients.

In the meantime the Rand could be sensitive to the outcome of Tuesday’s third-quarter South African GDP data and, just like other currencies, will likely be susceptible to any renewed U.S. Dollar strength should it materialise in the wake of this Friday’s U.S. inflation data for November.

This is after October’s figures revealed a further surge in price pressures that lifted the U.S. consumer price index to its highest level since 1990, which has since been credited with persuading Federal Reserve Chairman Jerome Powell and other members of the bank’s Federal Open Market Committee to begin favouring an accelerated pace of tapering for the Fed’s quantitative easing programme.

That tapering process had been scheduled to conclude around the middle of next year following an early November decision, although many analysts expect the bank to announce next week that it will now look to complete the process by March next year.