Rand Set for Best Month in Seven Years as Emerging Markets Rally

  • Currency advances even as top court rules against president
  • Zuma's removal by ruling party unlikely, Nomura says

South Africa’s rand advanced, halting 15 quarters of losses against the dollar and heading for its biggest monthly gain since 2009 as emerging markets closed out a March rally and investors looked beyond the political storm surrounding President Jacob Zuma.

The rand has strengthened 5 percent against the dollar this week after Federal Reserve Chair Janet Yellen said that the U.S. central bank should “proceed cautiously” in raising rates, prompting a shift to riskier assets. South African stocks have risen 5.6 percent in March, their best month since October. Benchmark local-currency government bonds are the best performers this week among emerging markets, returning 1.2 percent. Yields have dropped to their lowest since September.

The rand was the strongest after the ruble among the world’s major currencies against the greenback Thursday, even as South Africa’s highest court found that Zuma had violated the constitution. A gauge of the dollar fell to a nine-month low after Yellen’s Tuesday comments reflected concern that global headwinds may restrain the U.S. economy.

“The focus has been on those currencies that have sold off quite aggressively in January and the whole of 2015, going down to levels considered undervalued,” said Roxana Hulea, an emerging-market strategist at Societe Generale in London. “The rand has been the main beneficiary of this softening of sentiment.”

The rand advanced as much as 1.9 percent against the dollar Thursday to the strongest since Dec. 8 and was 1.3 percent higher at 14.7450 by 4:34 p.m. in Johannesburg. In its third day of gains, the currency is set to rise 5 percent in the first three months of the year, the first positive quarter since 2012 and is poised for its best month since April 2009 by climbing 7.8 percent.

South Africa’s creditworthiness has climbed, with the cost of protecting five-year debt against default tumbling close to the lowest level this year.

Even so, the March rally hasn’t removed the threats to Africa’s most-industrialized economy: The central bank has cut its growth forecast for this year to 0.8 percent, the weakest since the recession in 2009, while inflation is running beyond its 3 percent to 6 percent target. The country also faces a possible credit-rating downgrade: Standard & Poor’s has a negative outlook on its BBB- rating, one level above junk. Moody’s Investors Service rates South Africa’s debt one level higher.

All this makes investors’ conviction toward South Africa “very thin,” said Hulea. “We still have elevated headline risk which investors are reluctantly taking on because of what’s happening globally, and to the dollar, rather than the developments we’re seeing domestically.”

Ruling Party

In Thursday’s ruling by the Constitutional Court, Chief Justice Mogoeng Mogoeng said Zuma “failed to uphold, defend and respect the constitution and the supreme law of the republic” because he failed to abide by the graft ombudsman’s 2014 findings that he should repay some of the 215.9 million rand ($14.6 million) spent on his private home. While the rand gained as Mogoeng read his judgment, investors betting on Zuma’s exit may be left disappointed because of the dominance of the ruling African National Congress.

“The market views President Zuma on the back-foot and so sees a higher chance of Zumxit,”  said Peter Attard Montalto, an economist at Nomura in London. “As a result, South African assets will likely remain on the front-foot until the market realizes that this issue does not shift the needle decisively within the ANC. We expect the ANC in parliament to close ranks around Mr. Zuma and defeat any impeachment motion. Impeachment is very unlikely to happen.”

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