Rand Exchange Rates: Xenophobic Violence Taps ZAR Lower

A new briefing on the South African currency has suggested domestic unrest may have finally fed into exchange rate valuations.

The short-term direction in ZAR has turned negative lately with the British pound to South African rand exchange rate (GBP-ZAR) seen trading lower at 1.80543. 

The euro to South African rand (EUR-ZAR) is at 12.9960 and the US dollar v SA rand (USD-ZAR) is at 12.1542.

There is always the temptation to blame any negative moves in the ZAR exchange rate on domestic events, but as we have argued before, for the rand external drivers are tantamount.

Currency flows away from emerging markets and into the US ahead of interest rate rises is arguably the single most important factor for the currency.

The moves in the EUR-USD are by extension also more of a telling driver than domestic politics.

However, there are signs that happenings in South Africa may be impacting on the local currency unit suggests John Cairns at RMB.

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The Bad News

Cairns has pointed out in a briefing to clients of RMB that local news is mostly negative and this could finally be impacting on the ZAR.

Cairns for the most part does not hint at local issues as being of major importance in the vast seas of global finance, so these comments are of interest.

“Reports suggest the xenophobic attacks are starting to have an economic impact, with foreign workers leaving the country, inbound tourism falling off and South African companies in the rest of Africa seeing a drop in demand,” says Cairns.

The South Africa household house wealth index released yesterday showed wealth increased a paltry R147bn last year to R6,236 trillion.

Tuesday will meanwhile mark the eleventh straight day of load-shedding.

The Good News

“There is, however, a silver lining to the current problems: Eskom’s inability to keep the lights on has seen it sign an agreement to take 440mw from Sasol, hopefully opening the way for other independent power producers to sell into the grid,” says Cairns.

Concerning the outlook we stand by our view that external drivers will be important despite the domestic drivers we have looked at in this piece.

The US dollar complex has hit the brakes on its once unstoppable rally higher and should, on balance, give those looking to buy dollars with their rand some relief.

The pound v rand is meanwhile still stuck in a sideways trade; we see little indication that a break of these levels will occur soon and would feel safe playing a sideways range trade.

Watch the Euro v Dollar

As mentioned though, for the South African Rand external drivers are key.

"USD/ZAR’s outlook remains mostly just a reflection of EUR/USD, which has been swinging in ranges between 1.0450 and 1.10 since March and currently looks settled around 1.07," notes Cairns.

While talk of a move to parity remains widespread, dollar gains have struggled to get going.

"This is mostly due to the weakness in the US data of late and we suspect it is only when US data strengthens significantly that EUR/USD will start falling again," says Cairns.

It is for this reason that we await the return of strength in the USD, which is tipped to occur in September, before seeing any major moves in the rand exchange rate complex.