Rand steadies as US and South African elections put markets on alert

The rand strengthened against the United States (US) dollar on Monday as a softer greenback and easing oil prices provided support, with investors turning their attention to a week packed with political and economic events on both sides of the Atlantic.

On Monday afternoon, the rand was trading at R16.64 to the US dollar, gaining 0.37% from the previous close.

It was also firmer against the pound, trading at R22.33, up 0.16%, while the euro strengthened against the local currency to R18.66, gaining 0.13%.

Gold rose 0.66% to $3 900.41 an ounce, while Brent crude fell 3.85% to $109.06 a barrel.

Bianca Botes, managing director at Citadel Global, said the dollar was under pressure, with the US 10-year Treasury yield trading near 4.94%, close to seven-week lows, after falling almost 40 basis points during October.

“A December Federal Reserve rate hike remains a coin toss as uncertainty around the Fed’s next interest rate decision was also weighing on the dollar. The Fed held interest rates at between 3.75% and 4% last week, with two members dissenting in favour of an increase. However, the possibility of a December rate hike remained uncertain,” Botes said. 

The softer dollar helped lift gold towards $3 905 an ounce following its sharp sell-off in late October.

Brent crude also retreated as prospects of de-escalation around Iran and the Strait of Hormuz reduced concerns about potential supply disruptions.

Botes said the week ahead would be dominated by Tuesday’s US midterm elections, South Africa’s local government elections on Wednesday and the release of US October employment figures on Friday.

Earnings from major companies including Apple, AMD and Palantir would also be in focus.

Elections could shape rand outlook

Maarten Ackerman, chief economist at CAM Asset Management, said the immediate market reaction to the US and South African elections could be relatively contained, as some expected outcomes had already been priced into markets.

However, he said the longer-term implications for policy, governance and political direction would be more important for investors.

“In the US, the election outcome could influence expectations around fiscal policy, government spending and the country’s borrowing requirements. These factors feed through to Treasury yields, the dollar and global liquidity, with implications for emerging-market currencies such as the rand,” Ackerman said. 

He added that a stronger showing by the Democrats, particularly if it resulted in greater restraint around some of the larger spending plans, could lead markets to price in an improved fiscal outlook.

“This could ease pressure on longer-term US Treasury yields and the dollar, creating a more supportive environment for emerging-market currencies. For that reason, the US election could potentially have a bigger immediate impact on the rand than the SA election, unless the local result delivers a significant surprise, particularly a stronger-than-expected shift towards populist parties,” Ackerman said.

Local government elections

South Africa’s municipal elections, meanwhile, will be watched for indications of coalition stability, governance and the ability of political parties to implement economic reforms.

Ackerman said investors would be looking for signs that parties could form stable and functional coalition governments capable of improving service delivery and addressing governance challenges in struggling municipalities.

He added that the results could also influence perceptions of the sustainability of the Government of National Unity and the continuation of its more business-friendly economic reform agenda.

These factors are important because they influence the risk premium investors attach to South African assets, which in turn affects government bond yields, the rand and domestic financial markets.

“We have seen in the past how unstable coalitions can undermine service delivery and governance. The market would therefore respond positively if the elections result in more durable coalitions that are able to govern effectively and begin turning around some of the country’s struggling municipalities,” Ackerman said.

He said the distinction for investors was that the US election was primarily about the potential implications for fiscal policy, Treasury yields and the dollar, while South Africa’s vote would be judged on what it indicated about coalition politics, governance and reform.

For the rand, developments in the US could therefore have a greater immediate influence, unless South Africa’s municipal election results deliver a significant political surprise.

ashley.lechman@nationalmg.co.za