Since the onset of the COVID-19 pandemic, foreign exchange markets experienced a whirlwind of volatility as movement restrictions and a weakened global trade weighed on import and exports and oil prices.
This, coupled with government debt selloffs by risk-off foreign investors, led to the strengthening of the dollar at the expense of the South African rand, which fell as low as ZAR19.08/$ as the country went into lockdown.
However, this quarter, the rand has appreciated to ZAR15.23/$ and currently trades at pre-pandemic levels – its strongest in nine months, making it the top performer in emerging markets, bar the Mexican Peso.
Notably, the rand is supported by South Africa’s much improved current account balance, amid lower imports – owing to reduced oil demand and prices – and elevated precious metal prices, the country’s major export. Also, agriculture exports increased by 5.0% y/y in Q3-2020, according to the Agricultural Business Chamber.
However, the recent rally is also buoyed by the recent risk-on sentiments fueled by vaccine optimism. This has led to renewed demand for riskier investments and is reflected in the strengthening observed across several emerging market currencies and the weakening of the US Dollar.
Recently, rating agencies, Moody’s and Fitch, further downgraded South Africa into junk territory, citing high and rising government debt and a poor economic growth outlook.
Despite this, we expect the rand to remain supported majorly by export gains and vaccine-related optimism. Additionally, the panic selling by foreign bondholders in March reduce Rand’s exposure to external shocks.