The political scene in the United States has boosted the rand’s performance, which firmed against the struggling US dollar. Breaking through the USD/ZAR 15.00 level, the rand closed at R14.91 against the greenback on Wednesday.
In line with other emerging markets, the rand benefitted from risk-on sentiment, as investors witnessed the inauguration of Joe Biden, the 46th president of the United States. Market participants appear to be more willing to take on risk, as investors prepare for the first stimulus package under the Biden-Harris administration. The prospect of a USD 1.9 Trillion relief plan has seen investors edge towards high-yield assets. The increased demand for the emerging market currency has helped to bolster the rand, while the weakening of the greenback contributed to the currency’s continued appreciation. The ZAR has also benefited from the SARB’s decision to hold the repurchase rate at 3.5%, avoiding a rate cut that would make local assets less attractive to foreign investors.
However, most local performance metrics have helped to highlight the challenging position that South Africa has found itself in. This includes rather disappointing retail sales data, declining mining production and a bleak outlook on a country that is constrained by resurgent Covid-19 infections and strict lockdown regulations.
While the government’s budget deficit continues to rise, there are various concerns surrounding South Africa’s long-term fiscal health. Taxpayers may have to come to terms with the possibility of higher tax rates, a rather unconventional tactic amid the recessionary climate. Yields on Government Treasury bonds increased, with 2030 bonds yielding 8.775%. The steepening of the yield curve indicates that bondholders remain concerned about the struggling local economy and the rising debt burden. Long-term inflation is likely still a concern, despite recent inflation rates of 3.1% sitting at the lower band of the country’s inflation target.
Towards the end of the week, the risk-rally faded and the South African ZAR experienced a significant pullback. The rand closed the week at R15.08, as investors began digesting the poor local economic data.
The rand is expected to endure another week of volatile trading, remaining responsive to global risk sentiment and further news relating to the US stimulus package. Joe Biden still faces significant challenges in getting the stimulus bill passed and will need support from both the House and the Senate. The ZAR started the week off with a notable depreciation, measured against major currencies such as the dollar and the pound.
Market event calendar
Tuesday 26 January
- UK: ILO Unemployment Rate
Wednesday 27 January
- AUS: Consumer Price Index (QoQ)
- US: Fed Interest Rate Decision
- US: Fed’s Monetary Policy Statement
Thursday 28 January
- US: Fourth quarter Gross Domestic Product (QoQ)
Friday 29 January
- GER: Fourth quarter Gross Domestic Product (QoQ)