The South African rand, which on Tuesday broke above R6,70 per dollar for the first time since early September, could easily be back above the R7-per-dollar level in coming weeks, analysts say.
Econometrix Treasury Management market analyst George Glynos said Tuesday’s move in the rand was almost entirely euro-driven.
The European currency on Tuesday spiralled to its worst level in seven months and was trading below $1,24 on continued fallout from France’s no vote on the European Constitution. It was trading above $1,36 in December. The rand was below the R6-per-dollar level as recently as March.
Glynos added that the dollar’s strength was having an impact on the gold price. It therefore had to have an effect on commodity currencies, including the rand.
Sentiment is skewed against the local currency at the moment, he asserted. Monday’s 12% devaluation of the Botswana pula has contributed to this negative mood.
“Given that the pula is largely pegged to the rand, if they believe the pula is too strong as a result of the peg and they are devaluing it despite the rand’s recent weakness, that is fairly telling,” he commented.
He said this devaluation merely added to recent comments by the African National Congress, the Congress of South African Trade Unions and the South African Reserve Bank that the rand is too strong.
Glynos continued, however, that these local factors have already been priced into the market. The rand is increasingly being driven by improved dollar sentiment.
An inverse head-and-shoulders pattern — a technically bearish signal — is also in play.
“The [inverse] head-and-shoulders plays out over a long period of time. The rand broke the neckline on March 22 this year. It came back to test the neckline and made two or three attempts. When it failed to sustain a break below the neckline, it started heading for the target at R6,80, which it is near now. The formation has proved accurate so far.”
Glynos said the rand has the potential to break above the R7-per-dollar level again, driven by the resurgent dollar.
“Some profit-taking should kick in at some point, but traders are reluctant to go against the dollar. Fundamentals are not in their favour.”
Absa treasury economist Chris Hart agreed that the rand is headed back above the R7-per-dollar level.
“But it is at sea — it is very unsettled at the moment,” he commented.
According to Hart, the dollar’s strength — and the rand’s weakness — could continue for another two to three months.
“There does appear to be an underlying hedge fund wild card behind the [dollar’s] move, which should be over by end of June to July. When that wave of redemptions is over, we might have a source of inflows into the United States slowing down,” he said.
He added that by August, there might be enough evidence to suggest that the US can’t hike rates much more, which could also stem the level of inflows into that country.
Hart said that other factors, such as a sluggish US economy, would likely be coming to the fore by that stage, also suggesting that, with the strengthening dollar, the budget deficit is unlikely to be plugged.
“Those fundamentals are likely to stamp their influence on the market in two to three months’ time,” he asserted.
Hart does not believe the international factors helping to support the rand will go away soon.
“Eventually dollar weakness will resume, but it may take time,” he concluded. — I-Net Bridge