A Resurgent US Dollar Could Keep The Rand Under Pressure Into Year-end

A resurgent greenback could keep the Rand under pressure in the short term, according to strategists, while domestic politics might could present a risk to the currency as year end approaches.

The South African Rand weakened across the board over the course of September as a stronger Dollar, initially driven by geopolitical risk and latterly monetary policy, hammered emerging market currencies.

“Her hawkishness boosted US treasury yields, which firstly helped the Dollar and secondly took EM currencies to the cleaners,” say strategists at Treasury One, a treasury services firm based in South Africa.

Fed chair Janet Yellen signalled to markets last week that the Federal Reserve is all but certain to hike in December, and with the Trump administration having released details of his signature tax reform policy, the Dollar now seems well positioned to hold its recent gains.

“Another US number to be aware of is the US treasury yield which is gaining momentum which could put a damper on the Rand,” says the team at Treasury One. “In short the Rand is a passenger to Dollar movement with risk this week from data (non farm), events risk (Trump) and market drivers (US yields).”

US nonfarm payrolls will be released Friday, covering the month of September, and are forecast to show the economy adding just 88,000 new jobs - due to expectations that Hurricanes Harvey and Irma had an adverse impact on new jobs gains for the month.

This is the lowest consensus forecast for a nonfarm payrolls number since November 2011 and, with other data like the ISM manufacturing survey showing businesses less affected than many had forecast, Friday’s number might not be that difficult to beat.

Beyond the short term, domestic South African politics may also begin to weigh on the Rand ahead of a key leadership election for the ruling ANC party in December.

“Our concerns on the political and fiscal risks in South Africa remain very high,” says Anezka Christovova, an emerging markets research analyst at JPMorgan.“We also believe that the probability of a sharp change in the leadership of ANC at the elective conference in December has decreased recently.”

The South African Rand gave ground to the US Dollar Monday but took ground from the Pound, which weakened sharply at the opening of a week packed with economic and political risk.

“The scenario of a compromise candidate now appears more likely, which would deliver little change to the structural
issues facing South Africa and may trigger immediate sovereign ratings action from the ratings agencies," says Christovova.

A ratings downgrade would mean big problems for the South African Rand because the country has already lost its investment grade credit rating at two of three major credit ratings agencies.  

If it is cut by Moody's, the absence of an investment grade rating at any of the big ratings shops will see South African debt automatically excluded from investment grade credit funds and indices, triggering a sharp increase in the supply of South African bonds on the market and a steep fall in the Rand. 

The Pound-to-Rand exchange rate was down 0.46% at 18.05 Monday and the USD/ZAR rate was up 0.41% to 13.60.

“The threat of a downgrade to junk of South Africa’s key local currency rating remains a concern, which would prompt removal from key bond indices and probably trigger a 7-10% fall in the ZAR,” wrote Razia Khan, a strategist at Standard Chartered, in a note last week.