South African Rand's Relief Rally Approaches Key Test

Above: The Union Buildings in Pretoria ahead of President Cyril Ramaphosa's inauguration.

The South African Rand has rallied as it sheds its political risk premium on the orderly establishment of a multi-party government following recent elections.

However, the rally now faces a key technical test that aligns with levels that might suggest the relief run is nearing completion.

"The domestic currency saw volatility around South Africa’s elections on investor uncertainty but has now strengthened towards R18.00/USD as the establishment of a new government has proceeded peacefully and successfully," says Annabel Bishop, an economist at Investec.

USD/ZAR 18.00 looks to be a key line in the sand for the exchange rate, which equates to 22.93 in GBP/ZAR:

Above: GBP/ZAR (top) and USD/ZAR.

Bishop says ZAR "is likely to see further momentum towards the key R18.00/USD resistance level, although it will be a difficult barrier for the domestic currency to sustainably break through."

These USD/ZAR and GBP/ZAR levels equate to those levels seen in May when investors were optimistic about a pro-market outcome from the elections. The Rand subsequently fell when nerves emerged that the ANC would potentially merge with radical left-wing parties.

The return to the pre-anxiety levels suggests the market might be approaching valuations that are reflective of the new political settlement.

"With South Africa’s election outcome seen as promoting stability, democracy and unity, financial markets attention will likely turn to the US interest rate cut timing and see modest volatility on related upcoming US data releases," says Bishop.

Risks to the Rand's outlook include dysfunction in the new government, which would slow reforms and raise political uncertainties.

For now, however, there is a feel-good factor and a clear willingness in the major parties to make the government work. This can create a honeymoon period for ZAR assets. The real tests will come in a multi-year timeframe.

"This collaborative effort is rooted in our shared commitment to uphold the Constitution, promote non-racialism, and ensure social justice and equity for all South Africans," said the ANC in a statement released Monday.