Rand brushes off costly election jitters to soar to 10-month high against dollar

The rand has perked up of late, defying the prophets of its doom.

On Monday, it reached 18.11/dlr, its strongest level in almost 10 months. In April, the currency had slipped to around 19.30/dlr at one point as jitters about next week’s national elections set in.

Political nerves have since calmed considerably, with the prospects of the ANC forming an alliance with the EFF or disgraced former president Jacob Zuma’s MK party seen as diminishing.

The fact that the ANC is still seen by polls as being in the driver’s seat underscores the point that the markets are more comfortable with the devil they know.

“ANC gains in the polls, to just above 45% in the daily SRF polls, have allayed concerns, with expectations of an ANC coalition with the centrist IFP party instead of the extreme left-wing EFF,” Annabel Bishop, Investec chief economist, said in a note on the rand on Monday.

“... an unexpected outcome where the ANC does decide on a national coalition with the EFF would then result in very severe rand weakness.”

Read more in Daily Maverick: 2024 elections hub

Other analysts have also pointed to the polls as showing a more market-friendly outcome than the worst-case scenario where the ANC partners with the EFF or the MK party.

“We suspect there has been an unwinding of hedge positions now that it looks like the elections could avoid a worst-case scenario,” George Glynos, head of research for the ETM Group, told Daily Maverick.

The rand has also been widely regarded as undervalued, and so the improved political outlook has provided it with an opportunity to follow the technical charts to a more realistic level.

Things have certainly come a long way since early April when a poll showing a surge in support for the MK party sent the rand into a tailspin.

Read more in Daily Maverick: Rand plunges after poll shows surge in support for Zuma’s MK party

The reaction to Monday’s Constitutional Court ruling that Zuma is not eligible to stand for office in the National Assembly because he was convicted of an offence and sentenced to more than 12 months in jail has the potential to raise political tensions in a way that would not be good for rand sentiment.

Read more in Daily Maverick: Jacob Zuma not eligible to stand for parliament, ConCourt rules

But the ruling also underscores the judiciary’s commitment to the rule of law, which is no bad thing in the eyes of the market.

Other political scenarios for the election’s outcome obviously have risks and upsides for the rand and the economy more widely.

Looking at the potential scenario of the Democratic Alliance-led Multi-Party Charter — or Moonshot Pact — forming the next government, Oxford Economics Africa said in a report last week that such an outcome would boost the market mood.

“Widespread market euphoria shows investors are glad to see the back of the ANC, and local assets rally strongly across the board,” the report said.

But that is not seen as likely by most pundits and the political underpinning of the rand’s rally seems to be a scenario in which the ANC has to conduct the business of government with sensible parties — and perhaps has to compromise in sensible ways.

The rand’s resurgence also stems from other factors.

Eskom’s suspension of rolling blackouts for over 50 days and counting has also clearly lifted market sentiment. The power shortages have for years been seen as the biggest constraint to economic growth, industrialisation and job creation.

Having said that, it’s also revealing to note that in the first three months of this year — before the record run — the number and extent of the power cuts were slashed compared to the same period in 2023.

Yet the economy in the first quarter of this year may have slipped into a contraction, despite the improving power situation.

That underscores the fragility of the economy, which does not bode well for the rand in the longer run.

Read more in Daily Maverick: How SA economic contraction helps explain why lights are on

On other fronts, recent US data has raised expectations that the US Federal Reserve could begin its long-waited rate-cutting cycle, which would provide additional support for the rand and room for the SA Reserve Bank to begin loosening monetary policy as well.

But the interest rate outlook changes on an almost weekly basis and remains very uncertain.

The political climate could also change dramatically in the next two weeks, and where the rand trades in early June may be an indication of its range for the rest of the year — and perceptions of the political direction South Africa will take. DM