Rand claws back previous session losses
JOHANNESBURG – The rand benefited from a hunt for yield to trade firmer during the European session according to NKC Research.
Amid a thin global calendar, the market has been searching for direction, but some caution remains as the ECB and FOMC are due to deliver policy announcements soon.
Despite its fragile fundamentals, carry appeal should continue to underpin interest in the rand – as South African bonds continue as a heavy overweight with still the highest risk premia in local-currency EM.
Although the rand has more than recovered from the Q1 setback, valuations continue to bode for meaningful further upside. Although the deficit is likely to remain historically high on our forecasts justifying a high premium, there are a number of things going for SAGBs this year. The current account has been in surplus this year, which is largely due to import compression.
Although a demand recovery would mean a decline in the surplus, this is the first surplus since the early 2000s. Export growth was outstripping import growth in the build-up to the Covid-19 crisis.
Net FDI has been rising in recent years, hence the quality of external funding has improved. Net portfolio investment has been falling which shows that investor positioning has been structurally light owing to ratings downgrades in recent years and, lastly, terms of trade have had a significant boost from rising commodity prices.
At the close of local trade, the rand quoted 0.50 percent stronger at R14.24/$, after trading in range of R14.25/$ – R14.34/$. The rand traded slightly softer overnight. The expected range of the rand against the dollar today is R14.15/$ – R14.30/$.