Forex trading – rand hits fresh highs as ANC loses ground in South Africa elections.

South Africa’s rand rallied to its strongest level in 9 months against the US dollar, as support for the ruling ANC waned in elections held this week.

The ruling African National Congress saw its share of the vote slide to 55%, its worst performance since coming to power in 1994.

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Elections

 

Investors seemed to cheer the prospect of a viable opposition, as the Democratic Alliance increased its share of the vote to a level that gives it a shot at forming the next government in 2019.

The prospect of a stronger opposition could force the ANC to deliver more responsible economic policies, analysts have said.

Political instability and a scandal-hit ANC has not been good for the rand. The currency went into freefall last December when president Jacob Zuma sacked two finance ministers in a week. In particular, the firing of Nhlanhla Nene from his position hit confidence and sent foreign portfolio flows into the country into negative territory.

Coming into the elections, the rand rallied, with the currency hitting its strongest level since October versus the dollar.

The rand has also been rising against the pound, which has fallen sharply since the Brexit vote of June 23. GBPZAR has slipped to its weakest since last April.

Carry Trade

 

But it’s not just about the political scene. The rand has been rising since May 22nd as higher interest rates support the carry trade. South Africa’s central bank has twice raised interest rates this year, hiking the main rate to 7%.

According to Bloomberg, the rand carry trade delivered 6.7% returns in July – twice that you would have got from the South Korean won carry.

Demand for South African bonds has soared lately, too, boosting the rand as yield-hungry investors search for returns.

 

Struggling Economy

 

The slide in the rand that started late last year boosted exports but the outlook for South Africa’s economy is not pretty.

The economy shrank by 1.2% in the first quarter as it heads for its worst year of growth since 2009. The IMF thinks it will avoid recession, but only just, with growth of just 0.1% in 2016.

Fitch and Standard & Poor’s have both held the country’s credit rating at just one notch above junk status, but warn this could be cut it if the economy doesn’t improve.

And both ratings agencies and the IMF have cited political interference as a worry for South Africa’s economy.

“Domestic politics and policies that are perceived to harm confidence,” are among the chief downside risks, the IMF said in its report.

Whether the elections will do anything to improve this remains to be seen, but the rally for the rand is at least a sign that investors are hopeful for greater stability.