The South African rand has shot up to its best level in nearly three months after hitting rock bottom in May. Like other emerging market currencies, the rand has spiked on reopening of economies and an increase in global risk sentiment. As South Africa attempts to ease its lockdown measures and stimulate growth, does the rand have more room to advance against the US dollar and other currencies?
In March, when the coronavirus pandemic massacred global financial markets and prompted everyone to dive into the greenback, emerging market currencies experienced a nosedive. One of these currencies was the South African rand, which cratered to a record-low 19.3416 against the dollar. Although the rand is still down 20% year-to-date, it has risen 9% over the last month.
For many novice investors, the rand’s ascent might be befuddling. South Africa’s economy is forecast to contract 7% this year, the worst since the Second World War. The country has also acknowledged that it would continue to see an uptick in COVID-19 cases, President Cyril Ramaphosa noted that the several-week shutdown allowed the government to prepare for an expected surge adequately.
Put simply, the negativity had already been priced into the currency, much like other elements of global financial markets. Overall, optimism and recovery are fueling the rand and other emerging market currencies’ surge. Experts also note that if there are greater capital inflows and a revival in global trade, the rand could eventually wipe out most of its losses in 2020.
What is even more impressive is that the rand has joined the broader market rally, too. The Johannesburg Stock Exchange’s Top-40 index jumped 2.91%, while the All-Share index gained more than 3%. The bond market also rallied as the yield on the benchmark 10-year note dipped 15.5 basis points to 7.335%.
Michael Nderitu, head of trading at pan-African currency broker AZA, wrote in a research note on Friday:
A cross-continental easing in restrictions on economic activity — in some cases spurred by protests, as in Senegal — furthered the recovery in currencies this week from South Africa to Kenya.
While a heavy economic toll continues, we see the reopening of businesses and markets, helped by easing of monetary and fiscal policies, steadying or strengthening currencies near term.
The Reserve Bank of South Africa recently confirmed that its foreign exchange reserves were relatively unchanged in May at $52.77 billion. Officials noted that the latest measurement highlighted a boost in gold prices, valuation adjustments, and forex payments made on behalf of the government.
The USD/ZAR currency pair declined 0.45% to 16.7791, from an opening of 16.8556, at 16:24 GMT on Monday. The EUR/ZAR fell 0.22% to 18.9514, from an opening of 18.9930.