Ricochet News

The Carry Appeal can help South African Rand

By Jeffrey Cammack - Oct 25, 2017
The Carry Appeal can help South African Rand

The South African Rand exchange rate has been flat for the most part of the 2017 but, the long-term investment landscape has the potential to drive the Rand up against the US Dollar by the end of 2017. We are starting to see some evidence on this front as the USD/ZAR rate has slowly started drifting higher.

"There is a huge amount going on in South Africa, but the external environment is reasonably benign. We think dollar strength will have run its course by the end of the year and investors will get back to carry. The rand will likely benefit from those flows," said Chris Turner, global head of strategy at ING – citing Fin24.

The political uncertainty and the threat over a widening budget deficit are all market themes that are starting to fade away, and we’re gradually moving into an environment where the fundamentals are starting to turn positive, which can have a supportive effect on the Rand. Note however, that many of the world’s economies have been running deficits in the last decade.

In this still global low-interest rate environment, investors search for yield can send renewed flows of investment into the South African Rand. Moving forward that Rand can benefit from the carry appeal and “lower inflationary pressures” says Jeff Cammack analyst at tradeforexsa.co.za.

The Carry Trade

The carry trade alone is capable of generating enough ZAR strength. If this theme starts to generate more interest among investors the markets will start to price this in. The carry trade can be seen as high dividend stocks so naturally, people would want to earn more on their dividends respectively on their carry trade.

In July 2017, South Africa's central bank cut interest rates for the first time in five years, meaning the SARB still has the most attractive interest rates with the benchmark interest rate at 6.75%.



The USD/ZAR technical pattern can be characterized by a very wide and unclear range. However, every price range can be the catalyst for trend development and a break above 2017’s low of 12.3073 can be the trigger point for a more sustained momentum in favor of the Rand.

After we have tested the highs of the year the USD/ZAR quickly turned around.  With this kind of reaction, it’s safe to assume that this move can have more investors to the downside in favor of the Rand.



Conclusion

The Rand has the legitimate potential to turn into a new carry trade if the broad-based dollar weakness seen through 2017 persists. The USD/ZAR also has one of the highest yield differentials, which qualifies it to represent the carry trade. With this consistency of high return, the Rand will always be a good alternative for investors seeking yield.