How to trade Forex (The Rand) during the general election
The following article looks to identify key election scenarios when trading the rand over the 2019 elections.
While major movements in the rand have and will continue to be dictated to a large degree by global themes in the market place (i.e. global growth, trade negotiations and Brexit), the South African 2019 general election holds the potential to provide the most significant catalyst for volatility in the rand over the next few weeks.
In our previous note, pertaining to the 2019 Elections: what it might mean for the South African economy, it was suggested that policy and economic reform were essential for investment and growth in the South African economy. It is believed that the level of policy certainty and reform may be determined by the margin of victory for the ANC. The following article looks to identify key election scenarios when trading the rand over the 2019 elections.
ANC Margin of Victory
While an ANC national election victory appears a foregone conclusion, the party’s margin of victory is still an area of debate. Election polls from varying sources (including the Institute of Race Relations and IPSOS) differ in their estimates for ANC support at a national level. The polls suggest that the ANC could receive anywhere between 49% and 61% of the vote (depending on voter participation). What the varying polls do agree on however, is that the party is expected to see a decline in voter support from the 62% achieved in the previous (2014) general election.
The ANC is currently said to be divided into two primary factions, namely that of the old Jacob Zuma led regime, and that of the new Cyril Ramaphosa led regime.
Should a large decline in the Cyril Ramaphosa led ANC vote emerge, it is rumoured that the Zuma faction may move to oust the weakened president. This scenario would threaten anticorruption efforts and rehabilitation efforts in state-owned enterprises, in turn hurting business confidence and investment sentiment.
Gareth Van Onselen, political Analyst at the Institute of Race Relations (IRR), highlights that according to latest polling data, conducted by the IRR (April 2019), a low voter participation (less than 68% of registered voters) could see the ANC’s national vote diminish to less than 50%. This situation would call for coalition governance at a national level.
The loss of a majority vote and in turn greater need for coalition, would provide a greater inhibiter to passing of policy reforms to stimulate investment and growth within the country.
Both increased factionalism and the loss of an outright majority (for the ANC at a national level) would imply leadership and policy uncertainty, which would be a net negative for business confidence and local financial markets.
Trading the rand with a low margin of victory
The ANC achieving less than 50% support in the upcoming election, is not our base case scenario, but it is believed to be the scenario with the potential to cause the highest levels of volatility in markets. Disrupted policy reforms and uncertain leadership could ultimately equate to a further rating’s downgrade by the Moody’s rating agency as well.
The above chart of the USD/ZAR shows a short-term trading range for the currency pair between the R13.10/$ and R14.60/$ levels. The USD/ZAR is moving to test the resistance of this range (R14.60/$) as we draw closer to the election.
Should a “low margin of victory” scenario be realised for the ANC, we could see the USD/ZAR move to break out of this range with R15.70/$ the initial resistance target, a level last seen for the USD/ZAR pair in September 2018.
Maintaining a significant majority
Inversely, should the ANC manage to maintain a sizeable majority at the upcoming elections, the suggestion is that Cyril Ramaphosa’s seat at the helm is far more secured. This assumes that the president can maintain his anti-corruption drive, pass and continue to stimulate investment into the South African economy with less interruption.
The various election polls are suggesting an ANC margin of victory with between 49% and 61% of the vote. 55% becomes the mid-point of this range, and perhaps the level at which financial markets find positivity in the results.
This is our base case scenario for the elections and could equate to renewed strength in the USD/ZAR post the elections.
Looking at a chart of the USD/ZAR R14.60/$ is the key resistance level to watch into this election outcome. Should this level hold as resistance we think a move back below R14/$ is a likely probability and should the ANC share of the vote move closer to the upper end of the 55% to 61% range, a move to range support at R13.10/$ is a further possibility.
- The rand will be an election barometer reflecting election induced sentiment
- The ANC margin of victory could be a key factor in driving business confidence and investor sentiment
- A 55% to 61% margin of victory for the ANC might be positive for business confidence and investor sentiment, which could reflect positively with ZAR strength
- Rand strength should it emerge could see the USD/ZAR pair move back towards the R14/$ level and R13.10/$ level in extension
- A 49% to 54% margin of victory for the ANC might be negative for business confidence and investor sentiment, which could reflect negatively with ZAR weakening
- Rand weakness should it emerge could see the USD/ZAR pair breaking out of the R13.10/$ and R14.60/$ range and moving towards the previous 2018 high of R15.70/$
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