The big question for the rand right now

The rand has gained significant ground in recent sessions, benefitting from risk-on sentiment, and optimism around a global economic recovery.

The local unit firmed against the dollar in morning trade on Thursday, as investors weighed the US Federal Reserve’s commitment to keep interest rates low for some time against likely higher inflation, Reuters reported.

Minutes of the last The Federal Open Market Committee (FOMC) meeting released on Wednesday evening indicate that the US central bank will continue its accommodative stance until there is sufficient proof of continuous and sustainable economic growth, even if inflation rises above the desired 2% mark, said Bianca Botes, executive director, Citadel Global.

Lower US interest rate expectations boost investors’ appetite for emerging markets assets such as the rand, which offer higher returns but carry more risk, Reuters reported.

Combined with the easing of business restrictions and further progress in the vaccine rollout, market optimism has helped to boost risk-on sentiment support strong performance in the equity markets, said Sable International.

The rand traded at the following levels against the major currencies:

• Dollar/Rand: R14.48  (-0.26%)
• Pound/Rand: R19.92 (-0.74%)
• Euro/Rand: R17.20 (-0.19%)

RMB Global Markets strategist and head of research, John Cairns told Business Day TV that there are a few ‘puzzles’ around the rand’s trade.

Cairns noted that R14.40 against the dollar is a post pandemic low for the rand, having traded at more than R18.00 a year ago, during lockdown.

“The big question now for the rand market is, are we just going to remain in these ranges – in other words are we going to bounce from this R14.40/R14.50 level, or can we actually break lower? That would mean that the rand would now be stronger than it was before the pandemic struck,” he said.

Global news, he said has been so positive. “I still think R14.40 is going to hold…in other words the end of the rand recovery is starting,” Cairns said. He said that the current global environment is very risk on, fueling demand for riskier but high-yielding currencies.

“What we see is every time the rand strengthens, our importers rush in to buy dollars at better levels, and so that is restricting the move. It’s a big fight going on.” Cairns said that he is still a bit skeptical that R14.40 will break, but conceded that he has had to walk back on his scepticism in recent sessions.

The strategist said that the rand should have gained on global economics, and vaccine news, but it is the extend of its gains that has been a puzzle. “We can come up with partial answers to that puzzle,” Cairns said.

“The first is look, our trade account is doing so well, our exports are booming because of  commodity prices, imports are still constrained.” He said that there are other technical issues, forward points have become distorted because of what the Reserve Bank is doing in the money market – making going short against the rand very expensive for speculators.

Forward points are the number of basis points added to or subtracted from the current spot rate of a currency pair to determine the forward rate for delivery on a specific value date.

Dollar hopes

US Fed officials were united on the need to see more progress on the recovery before scaling back their massive bond-buying program, according to minutes from last month’s meeting released Wednesday. Policy makers have downplayed inflation risks, maintaining that the recent surge in Treasury yields reflects stronger growth prospects, said Bloomberg.

Traders have scaled back their most-aggressive positioning for interest rates to start rising by the end of next year, it said.

Turbulence should return to the market in the second quarter, said Banny Lam, CEB International Investment Corp head of research, on Bloomberg TV. Alongside the focus on inflation pressures, “we should put more focus on the theme of renewed economic growth.”

Meanwhile, Treasury secretary Janet Yellen unveiled details of a plan to bring back about $2 trillion in corporate profits into the US tax net. That would help fund the government’s spending initiatives, potentially reducing reliance on more borrowing that could drive rates higher, Bloomberg said.

Vaccine progress

Local markets were also boosted by the news that South Africa has signed a deal for the procurement of 20 million doses of Pfizer vaccines.

Health minister, Dr Zweli Mkhize, said earlier this week that payment processes are also underway to close the deal in the next few days.

In addition, with the Johnson & Johnson (J&J) agreement also fully concluded, Mkhize believes that this sets the stage for a significant and rapid expansion of the country’s Covid-19 vaccination programme.

“We can also confirm that the final tranche of 200,000 Johnson & Johnson doses for the Sisonke Protocol is expected to arrive on 10 April 2021. These doses will take us to the last mile of the Sisonke Protocol, which is set to become one of the most seminal studies in the history of the pandemic,” the minister said on Monday.

Likewise, he said the country will also embark on an implementation study with a limited number of Pfizer doses used amongst healthcare workers, which he describes as another valuable contribution to the science of mass vaccination.

“In preparation for the mass vaccination campaign, we have undertaken a deep study of the Sisonke Protocol to draw lessons from the programme and enhance the efficiency of future operations.”

In addition, stakeholders have continued to be engaged across all sectors to “sensitise” government to the needs of various communities.

“Upon deeper inspection and reflection, the Department of Health has worked on a revised strategy to ensure that the vaccination campaign targets the most pressing public health and the economic relief that vaccination should achieve.

“These revisions will require extensive yet urgent consultation to ensure that the final programme expresses the will of the people,” said the minister.

Upon completion of the ratification process, the department will announce the details of the revised vaccination programme to the public and call on the first group of eligible citizens to register on the Electronic Vaccination System.

“I wish to thank all government officials, business partners and social partners who are working around the clock to ensure that the programme is efficient, safe and exemplary. We look forward to announcing the details in the days to come,” he said.

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