Rand report: The rand starts strong after significant headwinds

Last week, excessive trade volume and high volatility sent markets into a frenzy, with the Chicago Board Options Exchange (CBOE) Volatility Index exceeding 36 (up from 23 on Monday 25 January). Heightened volatility has caused seasoned investors to shy away from equity markets, as volatility reached levels that haven’t been seen since November last year.

Emerging markets were left in the red, after a strong performance last week. Morgan Stanley Capital International’s (MSCI) emerging market index was down by 1.8% and the Johannesburg Stock Exchange (JSE) 40 retreated by 1%. This is in line with the slip in emerging market currencies, with the Russian ruble and Polish zloty performing particularly poorly.

The dollar benefitted from its safe-haven appeal, as the market remained jittery. The pound showed strength throughout the week, alongside the dollar, benefitting from significant progress in the UK’s vaccination campaign. The pound was further supported by increased demand for 30-year UK government bonds. Unemployment figures also exceeded expectations, despite the increase to 5%.

The rand remained volatile, swinging wildly against well-performing developed market currencies. The ZAR was unable to escape the negative outlook and lost some of the strength it mustered up last week.

South Africa’s GDP growth for 2020’s fourth quarter is expected at -0.5%, highlighting how Covid-19 has led to the contraction of economic activity. South Africa’s rapidly rising budget deficit could lead rating agencies to review their outlook on the country. Concerns over the country’s fiscal health and debt trajectory could call for further downgrades in the future. While developed nations are likely to avoid downgrades in the near-term, emerging markets are more susceptible and should prepare for this possibility.

Nevertheless, the rand opened stronger this week, up 0.62% against the greenback. Investors are also coming to terms with the possibility of a smaller US fiscal package than was originally proposed, as the Republican Party put forward its $600 billion counterproposal. While the rand is expected to benefit from Dollar-weakness in the medium-term, rising government debt is likely to limit the further potential for the rand to breach the 15.0 psychological barrier.

Market event calendar

Tuesday 2 February

• EUR: Gross Domestic Product (Q4)
• NZD: Unemployment Rate (Q4)

Wednesday 3 February

• EUR: Consumer Price Index
• USD: ADP Employment Change (Jan)

Thursday 4 February

• AUD: Trade Balance (MoM) (Dec)