Financial Markets

Vulnerabilities prior to Covid19 meant that investor sentiment around South Africa (SA) was particularly fragile. The severity of the pandemic itself, further eroded investor sentiment, thereby weakening the rand and increasing market volatility. During this time, we saw the USDZAR trading at over R19/$. In recent weeks, however, the rand has gained substantial strength, and is now trading below R14/$. In this blog, we explore some of the reasons for the rands remarkable recovery. These include: 1) Dollar weakness on the back of global markets balancing US fiscal and monetary policy. 2) High real interest rates offered in SA, which continue to attract offshore investments and capital. 3) A historic current account surplus on the back of strong commodity prices; and 4) Stronger-than-expected tax revenue data easing growth concerns. With global risks such as rising US inflation at bay for now, the rand may continue to benefit. The rand may also find support from a continued commodities upswing which is supportive of the trade balance and growth. However, local risks remain. SA’s economic growth is still a source of concern for investors. SA still faces serious fiscal challenges, including large government debt and tricky negotiations around the public sector wage bill. Adding to this, the slow start to the COVID19 vaccination programme and the threat of a third Covid-19 wave could add downward pressure to overall investor sentiment. These real economy risks may limit future rand strength.