South African Rand Outlook Negative on the 'Politics of Demand'

Student protests may not have a near-term impact on the South African Rand but longer-term they point to a worrying trend that could lead to further ZAR weakness.

The GBP to ZAR exchange rate is poised to break back above the psychologically significant 21.00 zone as the fundamental outlook facing the South African economy takes a turn for the worse.

Momentum remains firmly behind the pound sterling when trading against the SA rand confirm the charts; the move off October lows at 20.09 remains valid.

However, we will watch for a break  of 21.00 to occur befor backing GBP/ZAR to hit a 2015 best above 21.40 again.

Momentum indicators are in positive territory and advocating for further gains; GBPZAR is above the 20, 50 and 100 day moving averages on the daily charts.

From a fundamental perspective, the rand has been a sharp underperformer in the generalised currency sell-off.

"Most will ascribe this to the student protests but it could be argued that the weakness started after the budget on Wednesday. The cause makes a difference - the protests are temporary, the budget is structural," says John Cairns with Rand Merchant Bank in Johannesburg.

While protests will continue today at some campuses, they will probably not have huge support after the government gave in to their initial demands.

"This suggests we could see USD/ZAR unwind some of the 10-20 cents underperformance. Admittedly, even if the protests do die away, there will be some lasting damage," warns Cairns.

"The additional government resources needed to fund the 0% fee increase is not huge but the politics of demand have shown that it can work: first it was e-tolls, then student fees, what next?" asks the RMB economist.

SARB to Keep Rates Elevated, Provides Long-Term Support to ZAR

This October has seen South African Reserve Bank Governor Kganyago warn over effects of a weaker currency.

The ZAR is down about 15 per cent against the dollar, year-on-year, ensuring the cost of importing essentials such as fuel have come under significant pressure.

There is a risk that SA inflation, presently at 4.5 pct and within the bank’s 3 to 6 pct target range, will breach the target early next year.

The SARB will therefore likely be forced to keep interest rates high which should provide a backstop to longer-term declines in the ZAR.

However, higher rates will ensure the SA economy does not enjoy the same stimulus afforded to those economies that can afford to cut interest rates in a low inflationary context.