South African Rand's Golden Tinge

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The correlation between the price of gold and the South African Rand has reached a seven-month high, shows new analysis.

The South African Rand is one of the best-performing major Emerging Market currencies of 2024, which has surprised FX participants given the closeness of local elections.

Analysts at investment bank Société Générale say the strong relative outperformance of the rand should surprise most, particularly given the unsupportive global backdrop that has seen global interest rates rise amidst fading hopes for a 2024 interest rate cut at the Federal Reserve.

"The relentless rally in gold prices explains to some extent the rand’s resilience so far in a broadly stronger dollar environment in our view," says Soc Gen strategist Kenneth Broux.

The surge in the price of gold to a record high of $2,430 has bolstered the rand’s appeal, says Broux, as gold is one of South Africa’s top exports.

He observes the 120-day correlation between gold and the ZAR has climbed to a seven-month high of 0.46.

But other factors are at play, with Société Générale saying the Rand has also benefitted from the government’s decision to allocate $8BN of the general budget in the SARB foreign currency account to pay down government debt over the next three-year period.

Rand outperformance in the Emerging Market space is all the more surprising owing to the the fact that this is an election year, with uncertainty as to the outcome of the vote at its highest since 1994.

"The next major domestic headwind for the rand comes in the form of the general election on 29 May. The latest opinion poll by Social Research Foundation predicts that the ruling ANC party is not going to lose just its majority status, but that its voter support could plunge to historic low of 37% due to high levels of poverty/unemployment and rolling blackouts," notes Broux.

Assuming the ANC remains the largest party, smaller groupings could informally agree to support an ANC government on a vote-by-vote basis in return for some concessions.

The ANC could also enter a formal coalition with some parties, including a written agreement outlining legislative plans and the distribution of cabinet posts.

An opposition coalition has also been mooted, though analysts say this is highly unlikely.