The South African Rand Might Have Overreacted

The Pound to Rand exchange rate shot higher by over 2% on fresh political intrigue in South Africa hit the country's currency.

Many would say that with Article 50 being triggered this week the British Pound is the ‘political currency’ of choice; but the Rand knows how to steal the limelight for this accolade.

Markets sold ZAR heavily after Finance Minister Pravin Gordhan and Deputy Minister Mcebisi Jonas were asked to return to South Africa while on their scheduled offshore roadshow.  

The immediate response by commentators and markets was that President Jacob Zuma was moving towards dismissing his senior finance .

“If the forced return is about the court case over Gupta-linked companies’ bank accounts then you could argue that the Rand has overreacted. However, confirmation is unlikely, implying Rand volatility will remain high,” says Chris Cairns, a currency analyst with RMB in Sandton, Johannesburg.

According to Cairns, the “best rand scenario for today” is for USD/ZAR to stabilise above 12.50 within a ~30 cent range.

“Worst case is a cabinet reshuffle,” says Cairns.

The Pound to Rand rate is at 16.01 having recovered from a multi-month low at 15.45 and the Euro to Rand Rate at 13.85 having recovered from a multi-month low at 13.37.

Have Markets Been Trigger-Happy?

South African President Jacob Zuma announced on Monday, March 27 that he has cancelled the Treasury’s investor roadshow to the UK and US and ordered Finance Minister Gordhan to return home.

Reports suggest that Gordhan and Jonas’s forced return was probably about today’s court case on the bank accounts of the Gupta-linked companies.

“If so, then one could bravely argue that the rand has overreacted: the recall reminds of political risks and will require a higher risk premium to be built back in, but with no massive run,” says Cairns.

Analyst Arnaud Masset at Swissquote Bank suspects similar:

"The market is used to sudden spikes in volatility caused by Zuma’s government; therefore we expect that pressure should soon return to normal levels as investors resume their hunt for yields."

For Masset the high interest rate environment that South Africa offers relative to its peers should keep global investor flows strong.

Indeed, RMB to note that foreign investors do not seem to be panicking, they picked up R1.5bn of local bonds yesterday.

“Is this a buying opportunity?” asks Cairns.

Uncertainty Must Clear

However, Cairns cautions that it seems unlikely that clarity on the reason for the recall will be forthcoming.

If the Presidency was going to issue an explanation then surely they would have done so already?

And even if they did provide a statement, scepticism about the specified reason will remain high.

Gordhan and Jonas, meanwhile seem unlikely to offer much - “because the boss said so” was their response to the question yesterday - although the market will be able to read something into whether or not Gordhan attends court today.

“The biggest problem remains the same: how do you prove a negative?” asks Cairns.

The RMB analyst argues that even if the recall is primarily about the court case, this does not mean that a cabinet reshuffle is not coming or that the president is just “testing the waters” as many seem to be speculating.

And, as yet unconfirmed, talk that other ministers have also been recalled from overseas trips will keep speculation of worst case scenarios alive.

“Altogether the situation remains fluid and potentially explosive. Further runs on the Rand are certainly possible,” says Cairns.

Yesterday’s 50 cent losses are nothing compared to what would happen in the worst case cabinet reshuffle scenario — remember that when Nhlanhla Nene was replaced the Rand lost 150 cents immediately after and 250 cents within a month, this despite David Van Rooyen’s appointment as finance minister being reversed.

The Gordhan/Jonas recall is obviously the main story for today, and probably the week.

“But remember that the government has another bombshell coming: the latest — and very market unfriendly — version of the mining charter should theoretically come out this week. Global issues, meanwhile, can mostly be ignored,” says Cairns.