From zero to hero?
The South African rand, having earned the dubious distinction of being one of the most beaten up emerging market currency last year, has emerged as one of this year’s best trades as a rebound in commodity prices and the likelihood that US interest rates would stay lower for longer helped lure investors back in.
The currency clocked in its fifth consecutive day of gains against the greenback on Tuesday, rising more than 1 per cent to a near two week high of ZAR 13.86 as the market overlooked the country’s leadership crisis, economic stagnation and the risk of having its credit rating downgraded to junk.
The rand has risen over 7 per cent in the past three months alone and is the third top EM gainer so far this year after the Brazilian real and the Russian rouble.
Part of the rally is being driven by relief that the economy is proving more resilient than feared. Data published earlier this month showed South Africa’s economy rebounded from a 1.2 per cent contraction in the first quarter to grow at an annualised rate of 3.3 per cent in the second quarter.
Meanwhile, the country, the world biggest producer of platinum and manganese, is benefiting from the pick-up in global commodity prices.
Monetary policies – with expectations that both the Fed and South Africa’s own central bank would hold off on raising rates this week have provided further support for the rand.
Still Peter Attard Montalto, analyst at Nomura, warned that the rand’s ongoing rally could prove fleeting given the various global and domestic headwinds. He expects the currency to drop back down to ZAR 17 per dollar before the end of the year.
You’ve been warned.