"A Tremendously Bullish Signal for the Rand" - RMB Report

The South African rand is tipped to benefit from a shift in sentiment in global financial markets.

The rand continues to claw back lost ground from the US dollar, taking its cue from the strengthening euro.

“Markets are absorbing a structural change in the EUR/USD trend, a global bond sell-off, weakness in the US economy, a moderately dovish Fed, and a change in the oil story. This is bullish for the rand,” notes analyst John Cairns at RMB in Johannesburg.

While the South African unit is making progress against the world’s largest currency, we note it remains range-bound against other majors with the British pound holding its ground in particular:

• The pound to rand exchange rate (GBP-ZAR) is near the top of its long-term side-ways trending range at 18.2291.
• The euro to rand exchange rate (EUR-ZAR) is at 13.3786.
• The US dollar to rand exchange rate (USD-ZAR) is at 11.8858.

EUR/USD decisively broke the 1.10 level that has held repeatedly in April, jumping to towards the 1.12 level, strategists are now pricing in a move to 1.15.

“This signals that the great dollar rally of 2014 is over or, at worst, due for a long break. This is a tremendously bullish signal for the rand,” says Cairns.

It is noted by RMB that dollar gains, after all, have been the only driver of USD/ZAR upside in the past nine months.

We have noted in this publication that there is scope for the euro dollar rate to rally as high as 1.15.

Thus there is scope for further advances in the ZAR if the relationship between EUR/USD and USD/ZAR is to be kept intact.

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Watch Those Bond Yields

“The rand, however, faces risks from the rise in global yields,” notes Cairns.

The global bond sell-off came largely from nowhere.

It was German bunds that lead the decline; the 10-year yield jumping 12bp to 0.28%. (As bond yields rise the price of bonds falls).

Treasuries followed, jumping to 2.08% before reversing after the Fed.

“Higher global yields not only suggest our own bonds will sell-off today but represent a hit to the “search for yield” story that is so important for the rand and South Africa generally,” says Cairns.

Up to now, the rand has handled the repeated route in global bonds, but further yield upside might start to tell soon enough and reverse some of the South African Rand’s gains.

The first of May will be a public holiday in South Africa and drivers will therefore be almost exclusively external in nature.