South Africa's Rand Headed for Home Run of Outperformance as USD/ZAR Slides

• ZAR outperforming over multiple timeframes
• Helped recently by brighter economic picture
• As stronger growth & job market aids SARB 

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Official data casts South Africa’s economy in a brighter light than markets previously viewed it, which has in turn bolstered what is a favourable South African Reserve Bank (SARB) policy outlook for the Rand.

South Africa’s Rand trailed behind the Russian Rouble on Wednesday but notched up noteworthy gains over all other counterparts within the G20 grouping of currencies, echoing in turn its performance for the recent week and month.

This outperformance isn’t limited to the mere month leading into early June either, as the Rand was also close on Wednesday to topping the G20 league table for the current year and had been boosted in the most recent days by economic growth figures that confounded market expectations. 

“Yesterday’s better than expected GDP print for Q1.22 will add to the pressure for higher interest rates in SA, and a 50bp hike at the SARB’s July MPC meeting seems more likely now than a 25bp lift,” says Annabel Bishop, chief economist at Investec. 

“We now expect the MPC to hike the repo rate by 100bp in H2.22 in total as the FOMC does at its next two meetings. Marked pressure would be placed on the rand if the SARB allows the differential between SA and US interest rates to narrow significantly,” Bishop noted on Wednesday.

Above: USD/ZAR shown at daily intervals alongside selected other exchange rates. Click image for closer inspection.

South Africa’s economy grew at an annualised pace of 3% in the opening quarter of the year, Statistics South Africa data revealed previously on Tuesday, confounding an economist consensus that had envisaged an unchanged 1.7% pace of expansion. 

This data came hard on the heels of other figures released early last week that showed unemployment in the labour market falling during the same period and for the first time since soon after the onset of the pandemic. 

However, it also came ahead of manufacturing and mining production numbers that are due out on Thursday and which will provide an early glimpse at the pace of expansion within key domestic industries during the opening month of the second quarter. 

“As a result of improving market sentiment and reduced USD strength the rand has recovered significantly since mid-May, just like other EM currencies. Yesterday’s GDP data for Q1 provided additional support,” says Elisabeth Andreae, an FX and emerging market analyst at Commerzbank.

Above: Bureau for Economic Research (BER) Business Confidence Index shown alongside GDP growth. Source: Investec.

Andreae and Commerzbank colleagues warned on Wednesday that although the first quarter data was favourable, the April flooding in Kwa-Zulu Natal province and recent load-shedding from electricity monopoly Eskom might be likely to hamper economic growth during the second quarter.

“In any case, we expect the rand to trend weaker in the medium-term. In view of the weak growth prospects for South Africa – not least due to a lack of structural reforms – and the less favourable global interest rate environment, ZAR investors should mainly keep an eye on fiscal risks,” Andreae said.

These sentiments were echoed in part on Wednesday by Investec’s Bishop, who says the second quarter edition of the Bureau for Economic Research’s (BER) business confidence index provides clues about the likely performance of the economy during the three months to the end of June. 

“With the Q2.22 BCI survey taking place between 11th and 30th May it has been influenced by the KZN floods, higher costs, the drop in global financial market sentiment over April, as many key institutions revised down their global growth forecasts, and higher domestic and global interest rate expectations,” Bishop wrote in review of the business confidence data. 

Above: USD/ZAR shown at weekly intervals alongside selected other exchange rates. Click image for closer inspection. 

While second quarter figures could yet impact the South African Reserve Bank interest rate outlook in an adverse manner, the recent data has led many analysts and economists to expect the SARB to be more confident about continuing its recent cycle of interest rate rises. 

“The big debate globally is whether we are witnessing a regime shift as the inflation psyche adjusts from low and stable inflation to expecting higher and more volatile prices in the future. In South Africa, the SARB is still fighting the inflation battle on the expectations front,” says Carmen Nel, an economist and macro strategist at Matrix Fund Managers.

“The MPC’s hawkishness is to prevent us from returning to the high-inflation psyche that prevailed before and during the early years of inflation targeting. A tough time lies ahead as policy makers try to convince us that South Africa must remain exceptional. While the scales are tipped in their favour, we should expect continued hawkish rhetoric and potential action to ensure that the message takes hold,” Nel also said on Wednesday.

Reserve bank policy has been highly supportive of the Rand and more so in the present inflation environment where South African inflation has remained within the upper and lower bands of the bank's three-to-six percent target range. 

The SARB has lifted its cash rate four times since November, taking it up to 4.75% in May, and most recently suggested the benchmark could be likely to rise to 6.25% by the end of next year.