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After the Bell: The rand has been relatively stable this year, but post-election horse-trading looms

After the Bell: The rand has been relatively stable this year, but post-election horse-trading looms
(Photo: Waldo Swiegers / Bloomberg via Getty Images)

The rand’s ultimate course for the rest of 2024 will largely hinge on the government that emerges from the horse-trading that takes place in the coming days.

For all the talk about political uncertainty in the run-up to the 29 May elections, the rand has not been all that volatile this year by its often turbulent standards. 

That could change in the coming days and weeks as South Africa’s incoming coalition government takes shape.  

In the first five months of this year — up to the 29 May election and the two days that followed — the rand has traded in a range of roughly 18.08/dlr and 19.32/dlr. 

Here are its ranges for the previous four years over the same timeframe, 1 January to 31 May:

  • 2023: 16.72 to 19.72
  • 2022: 14.50 to 16.15
  • 2021: 13.52 to 15.52
  • 2020: 14.00 to 19.00

The first five months of this year were the most stable period for the rand over that period this decade. 

The currency seemed volatile during May, trading between 18.08/dlr and 18.80/dlr. But even that range is not all that unusual over a month for the rand, which is subject to wide gyrations for a range of factors.

These include its status as a proxy emerging market currency owing to the sophistication of South Africa’s financial markets, its categorisation as a commodity currency, which makes it vulnerable to boom and bust cycles, and the baggage of a slow-growth economy with numerous and growing challenges. 

Still, its relative stability in the year-to-date seems surprising, given that this was an election year and the most uncertain one since the dawn of democracy three decades ago. 

However, the fact that it was an election year might explain the rand’s relative stability. 

One reason is that investors and traders, when faced with political uncertainty, often opt for caution. You can lose a lot of money for yourself or your clients if you throw caution to the wind. Sometimes the best bet is to hang tight and wait and see. 

Another is that almost no pundits forecast the final result, with the ANC’s vote tally from the previous election plunging by more than 17 percentage points to 40.2% and Jacob Zuma’s upstart MK party emerging with the bronze medal on the political podium with 14.6%. 

The consensus which seemed to emerge in the last weeks before the election was the ANC at 45% or more, allowing it to form a deal with the IFP and not some radical economic transformation grouping. 

Moving beyond the political scene, it is worth noting that South African and US interest rates have not moved for some time. The last South African rate hike was in May last year and the last US Federal Reserve hike was in July. 

While uncertainty has abounded about the timing of expected US rate cuts, with the expected scenarios changing all the time based on US inflation and other data, the prolonged period of no changes in South African and US rates has also been a source of stability. 

The previous few years were extremely volatile for the global economy. The year 2020 was when the Covid-19 pandemic exploded on the scene and with it the initial hard lockdowns. 

In 2021 and 2022, the South African economy and economies worldwide were recovering from the pandemic amid huge uncertainty about the course it would take. 

Commodity prices were also turbulent, with platinum group metal (PGM) prices soaring to record highs and then collapsing into a heap. PGM prices in 2024 to date have settled into tight ranges at relatively depressed levels.

On the domestic front, there was also the worsening power and logistics crises from 2021 to 2023. This year, the power situation after a bad February has improved dramatically and light is also flickering at the end of the logistics tunnel. 

George Glynos, the head of research for the ETM Group, said much of the risks around South Africa — and not just the elections — had long been baked into the currency and this had been reflected in its value. 

“The markets were pricing risk going back to 2023. If you look at valuations, the rand has been uncharacteristically weak for an uncharacteristically prolonged period of time. There has been risk-priced in and not just for the elections. Load shedding was really bad in 2023,” he said.

“Elections often don’t have the impact on markets that people expect and so long as we get a favourable and not a dangerous coalition, the rand has the potential to recover.” 

The rand’s ultimate course for the rest of 2024 will largely hinge on the government that emerges from the horse-trading that takes place in the coming days. 

One that is seen as relatively market-friendly — say, an ANC match-up with the DA or smaller parties that are regarded as sensible — could see the currency make significant gains. 

Any hint of the MK or the EFF taking part in a government that might entertain some of their crazy policies will blow the currency out, though the damage might not be as bad as feared if this has been partly or largely priced into the markets. 

One thing to brace for is the rand potentially moving in a bigger range for the rest of the year than it has in the year-to-date once the political dust has cleared. And that range could take the currency, which is widely seen as undervalued, to much stronger levels. DM

Read more in Daily Maverick: Elections Dashboard

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