On first impressions, it certainly seems like the South African Rand has commenced the new trading year on the front foot. The local currency is currently trading around the 12.50 region, a significant distance away from the 2017 low when the Rand weakened to 14.50 before December’s ANC conference. So, the question on the minds of many is, what could 2018 have in store for the South African Rand?
As we have come to expect with the South African Rand in recent years, volatility is unlikely to go away. There are a few reasons to be positive on the Rand, including an apparent continuation of weak appetite towards the US Dollar. In 2017, the Dollar Index suffered its worst year since 2003, with losses above 9%, and the current sentiment suggests its fortunes are unlikely to turn the corner. The Dollar has, for the most part, started 2018 the same way that it traded for the majority of 2017, on negative ground. This is a significant positive for the Rand, even without recent developments in South Africa. It should also be noted that the continued rally in the Dollar over the years prior to 2017 put pressure on an overwhelming number of different global currencies, not just the Rand.
When it comes to South Africa, I don’t think we can expect a further acceleration of Rand purchasing following the aftermath of the ANC conference. While the likely Presidential change after the next election has been priced in by investors as positive, there is still a long way to go until the next elections. Upbeat sentiment around Cyril Ramaphosa could be something that will improve macro-economic factors in South Africa, including business and consumer confidence, although this won’t necessarily have a heavy influence in Rand fluctuations over the short run. The reports from the week commencing 8 January that President Zuma would step down have not yet been validated, suggesting that any potential increase in Rand purchasing following the next election may not take place until the event draws closer.
My concern for the South African Rand post ANC conference is that the accelerated purchasing might be a little too much, too soon. When a currency shifts by such momentum under such a short period of time, questions of investor profit-taking can surface. This is something potential Rand traders will likely monitor. Another potential negative for the Rand is that the current macro outlook does not warrant investors taking in further purchasing positions on the Rand at current levels.
Risk appetite is the main concern that could potentially provide the Rand with negative momentum over the coming months. It’s no secret that major equity markets printed all-time highs on a variety of occasions throughout 2017, but there is a question mark over whether this momentum can be maintained in 2018. If there is a round of serious profit-taking on the equity markets, this is likely to lead to risk aversion across the global markets and any drastic weakness in risk appetite will damage appeal to higher-yielding currencies, like the Rand.