Jameel Ahmad | FXTM
The rand has spent the last two weeks riding alternating waves of political uncertainty and weakening economic sentiment. Wednesday’s speech by Malusi Gigaba left the emerging market currency open to steep losses against the greenback following a downwards revision of economic growth from 1.3% to 0.7%, writes FXTM’s Global Head of Currency Strategy and Market Research, Jameel Ahmad.
The financial markets perceived Gigaba’s maiden budget statement as very negative. The new Finance Minister slashed GDP forecasts and announced that the treasury would increase international borrowing. His speech sent the rand tumbling against all major currencies on Wednesday afternoon, and ZAR was testing R13.9915 – its lowest intraday level since December 2016 – within hours of the announcement. The Rand has continued to encounter selling pressure in the aftermath of the budget statement, with the USDZAR touching a new 2017 high, above 14.20 just one day following the budget statement.
This latest blow is ill-timed, coming hot on the heels of a particularly tumultuous week. An unexpected cabinet reshuffle last Tuesday wiped 0.5% from the currency within minutes of the news breaking. Selling pressure was not initially severe, which suggested political risk premium had already been priced in the Rand and provided some support to the currency. However, this confidence did not last long, as speculation mounted that President Zuma was considering dismissing his deputy, Cyril Ramaphosa.
The negative headlines surrounding South Africa are encouraging investors to price risk premium back into the Rand. However, the fortunes of the currency have not been helped by a recovery in momentum of the US Dollar. In the wake of an unexpected cabinet restructure and a “brutally honest” mid-term budget, investors will be watching to see how the rand performs as the ANC elective conference approaches at the end of 2017. The decline in GDP per capita over the last two years, coupled with a soaring unemployment rate, is likely to weigh heavily on the ZAR, and investor focus on economic data will likely intensify as a result of the budget statement this week.
The aftermath of last week’s selling pressure does suggest the rand is still sensitive to political risk, but domestic politics is unlikely to be the only factor weighing it down. The greenback concluded last week on a high, rallying on news that the US Senate had passed key legislation that would allow President Trump’s Republicans to push ahead with promised tax reforms. A widening spread between Japanese and US government bonds also prompted a sharp rise in USDJPY last week, suggesting that the rand’s fall was not solely down to internal political machination.