ZAR: Why Rand Exchange Rates Are Struggling to Recover

Why, despite the nascent recovery in commodity prices, is the South African Rand exchange rate complex (ZAR) on the back foot?

Global stock markets continue to recover, lead by the resource-heavy FTSE 100 in London, on the back of a recovery in oil prices and commodity prices.

The recovery in raw materials has aided those currencies that share a similar profile to the ZAR - the Canadian, Australian and New Zealand dollars.

While the South African currency should be recovering we note it has made little progress:

• The pound to South African Rand exchange rate (GBP/ZAR) has reached a conversion of 17.5502.
• The euro to South African Rand exchange rate (EUR/ZAR) is at 13.7933.
• The US dollar to South African Rand exchange rate (USD/ZAR) is at 11.1936.

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Rand Drivers External in Nature

"Commodity export prices have broadly stabilised, with the only pressure coming from the stronger dollar," says John Cairns at RMB in reference to why the ZAR is underperforming.

"The immediate attention is on whether EUR/USD can break to a new 2014 low. The pair is at 1.2480 this morning, just a touch off the 1.2460 key support level. A break lower would risk USD/ZAR rising to 11.15," says Cairns in further reference the strengthening USD is having on ZAR.

According to Cairns' colleague, analyst Carmen Nel, the rand will remain a slave to global drivers, particularly the United States debt markets:

"A continued rise in US Treasury yields will very likely keep the rand under pressure as this would reveal expectations of stronger growth/higher inflation and the potential for earlier hikes.

"The prospect of strengthening cyclical growth (and higher US Treasury yields) should not be ignored as the fall in the oil price will be net positive for global growth.

"The rand’s vulnerability stems from the large current account deficit."

The SARB’s Monetary Policy Review noted this and indicated that the Bank expects ongoing rand volatility and a weakening bias.

"Yet normalisation is expected to be very gradual, leaving the unit susceptible if the Fed were to embark on earlier tightening," says Nel.

The Federal Reserve is widely expected to raise interest rates in mid-2015 as the economy recovers.

This will have the effect of sucking in global capital - at the expense of the South African money markets - thus driving up the valuation of the US dollar and driving down the value of the ZAR.

Nevertheless, the overall liquidity backdrop is encouraging, notwithstanding short-term event risk, and any losses should be gradual in nature.

"Today is quite light on the data front, leaving the rand to be dictated by global shifts, in particular commodity prices. While reprieve is warranted, some risk discrimination is at play. On the policy front, India is expected to stay on hold (the announcement is due as we go to print) while Eurozone PPI should have remained in deflation," says Nel.