Rand Recovery

15 June 2020 By PDSNET

The rand is arguably one of the most volatile and difficult currencies to predict. It is very liquid and is the preferred emerging market currency of international currency speculators. It has become a ping-pong ball which reflects the spasmodic shifts between “risk-on” and “risk-off” sentiment on the world stage.

If international investors get scared, then the rand falls – and quickly – as they withdraw their funds from here and buy long-dated US treasury bills. And then it rallies gradually as panic fades and awareness grows of our low inflation rate, relatively stable and high real interest rates.

Last Thursday (11-6-20) Wall Street had a momentary panic attack which drove the S&P down 5,9% in a single day. This panic was caused by a sudden renewed fear of a “second wave” of the coronavirus pandemic and concerns that the recovery in the US would not be as rapid as previously hoped.

The rand, which had been strengthening steadily to that point, responded by immediately collapsing from around R16.43 to the US dollar to R17.30. It lost over 5% in just two hours. Then, as the panic in the US subsided, it stabilised and began to claw its way back. Consider the chart:

Rand/Dollar: 11 June 2020, 10h00-16h00

(Chart by Dynamic Outcomes: https://www.forexforecasts.co.za/resources/live-charts/)

That panic may not yet be over and there may be further downside both in the S&P and the rand, but it shows clearly how the rand is a sensitive and volatile barometer of international sentiment.

What seems undeniable to us, however, is that the rand is fundamentally under-valued on world markets and that it is steadily strengthening over the longer term. While there can be little doubt that the economy’s situation is parlous from a local perspective, everything is relative and overseas investors tend to see us as a better investment opportunity than other emerging economies such as Brazil, Turkey or Russia. Consider the chart:

Rand/Dollar: Aug 2018-June 2020

Here you can see the upside breakout above the R15.50 support level in late February 2020 and the sharp impact on the rand as international sentiment, faced with COVID19, moved rapidly to “risk-off”. This was followed by a “double top” in April 2020 and then a fairly quick recovery – which is still on-going.

We see the rand as exposed to periodic waves of “risk-off” sentiment, but as continuing to strengthen over the medium term. This perception should inform your decisions on rand hedge shares as you look forward to next year and the inevitable recovery of the world economy. The simple fact is that international investors will always be flighty – but they always are drawn to real rates of return on our long bonds and so, as soon as any panic is over, they return here in their droves.


DISCLAIMER

All information and data contained within the PDSnet Articles is for informational purposes only. PDSnet makes no representations as to the accuracy, completeness, suitability, or validity, of any information, and shall not be liable for any errors, omissions, or any losses, injuries, or damages arising from its display or use. Information in the PDSnet Articles are based on the author’s opinion and experience and should not be considered professional financial investment advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. Thoughts and opinions will also change from time to time as more information is accumulated. PDSnet reserves the right to delete any comment or opinion for any reason.



Share this article:

PDSNET ARTICLES

Excessive Bullishness

On Friday last week, the S&P500 index posted yet another new record closing high, but this time just one point higher than the previous day at 5088. This means that the index, which measures the progress of the 500 largest companies on Wall Street, has been climbing without a significant correction for nearly four months. Consider the chart:

Lessons from Transcap

As a private investor it is very important that you study what has happened in the past and learn from it. The progress of Transaction Capital (TCP) has provided us with an excellent opportunity to examine and learn from a complete cycle in an institutional favourite share. We can examine the entire cycle and see how to profit from it. In this regard, it is important

Sasol

Sasol is a company originally established in September 1950 by the National Party, to counter the possibility of petrochemical sanctions against the old South Africa. Essentially, Sasol used South Africa’s enormous coal reserves to generate about one third of its fuel requirements. Subsequently, Sasol became involved in the chemical industry which now accounts for about

4Sight

The world has, in the last twenty years, entered what has been characterised as the 4th Industrial Revolution (4IR). It has been described as “... the biggest structural change of the past 250 years — a transformation of scale, scope and complexity unlike anything humankind has experienced before.” In simpler terms, 4IR refers to the digital convergence of

The Great Bull Resumes

On the 12th of June 2023, we published an article, headed "Bull Trend?". In that article we suggested that, after a 25% correction, the great bull market on the S&P500 which began in March 2009 was still intact and would, in time break to a new all-time record high, above the high

CA Sales

In recent years, the JSE has not seen many high-quality, exciting companies listing on the exchange. One of those few is CA Sales Holdings (CAA), which offered both fund managers and private investors an excellent opportunity to make a significant capital gain last year.

CAA is a company which has grown

Two Elections and Two Wars

As the New Year begins, private investors should consider the most important factors which are likely to impact on the prices of shares and the profits of companies listed on the JSE. Some of these factors are local, like the general election which is expected to take place sometime in May, and some are international like the oil price, the

Fundamental vs Technical

When you decide to buy a share, you are immediately in the business of forecasting. You are predicting that the share price will go up. Because, if you thought it was going to go down, you would not buy it. But, of course, the person that you buy it from makes exactly the opposite prediction – they believe it will go down – that is why they are selling it.

S&P500 Market Action

On the 20th November 2023, we tweeted that the S&P500 index, after its sharp rise of the previous sixteen trading days, would probably experience some sort of correction. That correction did, in fact, materialise, but the strength of the upward trend and the bullish sentiment present in the market reduced it substantially and it has

Near Equities

An equity or ordinary share is one which shares in the risk and returns of a company. Most of the shares listed on the JSE are ordinary shares which rise and fall in price as the company’s potential profits (and hence the prospect for dividends) fluctuate. This is compared to other types of investments like redeemable