Rand Outlook Deteriorates, GBP Approaches 20 and USD Solid Above 12

The South African Rand exchange rate complex (USD) remains exposed to demand for US dollars as we enter the second week of March.

“More immediate resistance comes in at Friday’s high of 12.10 and then 12.16. There is, however, scope for some pullback today as global markets settle down somewhat.” – John Cairns at RMB.

The outlook confirms further underperformance by the ZAR remains a favoured strategy in global FX.

We have warned time and again that for the South African currency buying interest in the US dollar will be key to the outlook.

As global capital looks towards the prospect of higher US yields thanks to the Fed’s impending interest rate hikes, so cash will flow out of locations such as South Africa as the yield advantage is whittled away.

This dynamic exploded into relevance at the start of March when employment market data out of the United States shows the economy is growing at a pace that could warrant USD-supportive interest rate rises to be implemented.

“USD/ZAR crossed above 12 for the first time since 2002 post-NFPs, while South African net foreign reserves declined to 41.92 billion dollar in February,” says Ipek Ozkardeskaya, Market Analyst at Swissquote Bank.

A look at the ZAR markets at the time of writing reveals intense selling pressure as oil and commodity prices take another dip:

The USDZAR is currently trading at 12.3499, nearly two percent higher. The pound to rand exchange rate conversion (GBPZAR) is meanwhile a full percent higher on a day-to-day comparison and is cruising towards the 20.00 level.

1 GBP currently buys 18.6461, a whopping move of 1.71% on the previous day's close.

The euro to rand currency conversion is seen higher at 13.559.

Keep in mind that the above quotes are representative of the wholesale markets - your bank will affix a spread to the rates at their own discretion when conducting your international payments. However, independent providers are able to get closer to the market rate, thereby delivering up to 5% more currency in some instances.

South Africa’s Rand to Soften

Friday’s bumper payrolls report opens up scope for a higher and much more volatile USD/ZAR say analysts.

Higher USD, reinforced by its negative impact on gold prices is certainly not good news for the rand and the central bank’s reserves at times they will be the most needed says the Swissquote analyst.

“With the fiscal consolidation lowering the expectations of a rate hike anytime soon, we see strengthening base at 11.40/12.00 (region including 21,50 and 100-dma at 11.7013/11.6079 and 11.4241 respectively),” says Ozkardeskaya.

John Cairns at RMB says after breaking through the 2008 and 2014 high of 11.89, there is no key resistance-top until the 2001 high at 13.84.

“More immediate resistance comes in at Friday’s high of 12.10 and then 12.16. There is, however, scope for some pullback today as global markets settle down somewhat after Friday’s spike and as the rand reverses some of its extreme underperformance. EUR/ZAR, in fact, could be the more volatile pair given the renewed uncertainty over Greece. EUR/ZAR starts at 13.05,” says Cairns in a currency forecast note to clients.

For the ZAR Decisions in the United States are Key                                                                        

Too often those looking to understand the rand’s valuation obsess about domestic issues in South Africa.

However, the reality is that external drivers are key for the African unit. No driver is more relevant at the present time than the US Federal Reserve and when they will add more value on the USD by raising interest rates.

The February payrolls number has created huge uncertainty about when the Fed will hike.

The headline figures were certainly extremely positive: 295,000 jobs were created against an expected 240,000 while the unemployment rate dropped from 5.7% to 5.5%.

Jobs growth has now totalled over 200,000 for 12 straight months, the longest positive run since 1994.

“The complications, however, are that wage growth actually dropped from 2.2%y/y to 2.0%, while other data suggest the US economy is growing only moderately,” notes Cairns.

Cairns points to a Reuters’ survey shows 9 of 16 primary analysts now expect the first Fed Fund hike to come in June and 15 of 16 expect two hikes by the end of this year.

Fed Funds Futures, by contrast, are pricing the first hike only in September.

“America’s dollar wears the crown these days. And because investors are clamouring to increase their exposure not only to the USD, but also to strengthening American economic fundamentals, we’re sold on King Dollar extending his stay on the throne,” says Jeremy Stretch at CIBC in London.

That said, relief for the South African rand exchange rate complex will be found in that uncertainly will remain in the next few months affording relief buying.

Expectations will swing with each key data point, leaving global markets extremely volatile.

The next key event is the 18 March Fed meeting.