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South African rand rallies as finance minister summons dropped

The rand suffered when South Africa’s finance minister Pravin Gordhan was summoned to court, and the currency is rebounding now they have been dropped. Assuming a calmer political situation, what’s the outlook for the rand and South Africa’s credit ratings now?

South African rand notes
Source: Bloomberg

Politics

‘I have directed the summons to be withdrawn with immediate effect. There is therefore no longer any need for your client to appear in court on the charges as listed in the summons.’ These were the welcome words from National Prosecuting Authority (NPA) head Shaun Abrahams relating to fraud charges against South African finance minister Pravin Gordhan and two former SA revenue service officials. 

The finance minister’s possible removal has caused volatility in local treasuries and has weighed on sentiment around the ratings agency reviews set for release on 2 December. While news of charges being dropped certainly doesn’t secure South Africa’s investment grade rating, it does improve the probability.

The rand leading gains

The rand has strengthened against its major currency peers on the news of the summons being withdrawn, and it is leading gains in emerging market currencies. The domestic currency is now moving towards its best levels of the year against some of the majors.

IN_USDZAR looks to be targeting near-term support between R13.37 and R13.19 (see chart below). However gains against the dollar might be muted towards the end of 2016 when we consider the likelihood of higher US interest rates and the possibility of a South African rating downgrade. 

Rand price chart

EUR/ZAR is seeing a strong move towards key support at R14.75, a break of which would open up further strength and make R14.15 the next level of target support. In the absence of a ratings downgrade and the European Central Bank’s continued commitment to monetary easing, the rand could be well poised to extend gains going forward. Technical traders might also warn of a head and shoulders chart pattern forming on the currency pair (labelled L, H and R on the chart below). 

EUR/ZAR price chart

GBP/ZAR has entered territory not seen for many years (excluding the pound’s flash crash). Renewed optimism in South Africa, combined with Brexit uncertainty has bode well for the rand. The trend for the pair favours rand strength and pound weakness and the only obvious near-term target, if the trend continues, is the flash crash lows of R15.14.

GBP/ZAR price chart

Ratings agencies

Continued rand strength or stability remains at the mercy of the ratings agencies: Standard and Poor’s, Fitch and Moody’s. For the time being it would appear that local treasury has settled, removing one negative ‘political’ catalyst from the mix. The medium-term budget, presented by the finance minister last week, shows a strong commitment to fiscal consolidation through tax increases and expenditure cuts, but economic growth will be a key factor in the future success of the consolidation if adhered to.

Recent trade balance data has shown a surprise surplus on the back of a welcome pick up in commodity exports which should lead to an improved current account. National debt remains a worry and is on the rise although the rate of the increase appears to be slowing. On balance we lean towards South Africa being able to maintain its sovereign investment grade rating this year, although the view that we may avert a ‘junk’ rating is favoured only marginally at this stage.  

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