SA markets give GNU a thumbs up as rand rallies toward R18/dlr

Will the exuberance prove irrational or short-lived?

Across the asset classes, South African markets rallied on Tuesday as investors cheered the incoming government of national unity (GNU). The rand, the JSE and bond markets all put in big gains, underscoring optimism about the political centre holding and with it the hope of badly needed reforms.

The rand raced to its near its best levels so far in 2024, reaching R18.10/dlr from R18.29 in early trade, opening up a clear path to test the waters below 18/dlr. Its strongest 2024 level, reached on 21 May, was R18.03/dlr according to Reuters’ data, and it is now within spitting distance of that.

“The domestic currency saw volatility around South Africa’s elections on investor uncertainty, but has now strengthened towards R18.00/dlr as the establishment of a new government has proceeded peacefully and successfully,” said Investec Chief Economist Annabel Bishop.

“The formation of the GNU has proceeded peacefully, giving the domestic currency a strengthening momentum.”

This view was echoed by other market watchers.

“Following a momentous week in the domestic political landscape last week amid formation of a new government of national unity (GNU), the rand begins the public holiday-shortened trading week on firm footing amid dissipating political uncertainty,” RMB Markets Research said in a note to clients.

The mood spread to equities and bonds.

In early afternoon trade on Tuesday, the JSE-AllShare index was 2.75% higher, while the yield on the 10-year government bond extended recent gains, bringing its yield down to 10.157%, its lowest levels since March. A bond's price and yield are inversely related.

Returning to the rand, the currency has been long viewed as undervalued by analysts, with potential political risk stemming from the 29 May elections baked into its price.

Read more in Daily Maverick: Zuma slams GNU as ‘white-led unholy alliance’ as MK party decides to join Progressive Caucus

The brightening political outlook — with radical parties such as the Economic Freedom Fighters and disgraced former president Jacob Zuma’s uMkhonto Wesizwe (MK) party out of the governing picture — seems to have triggered an unwinding of such positions.

Today's market moves may in hindsight be seen as euphoric. But for now, the mood is upbeat. DM