The South African rand is in a strong rally this year, making it one of the best-performing currencies in the emerging markets. The USD/ZAR exchange rate plunged to a low of 17.75, its lowest point since December 12 last year, and 10.5% from its lowest point in April.
South African government bonds have also surged. The ten-year yield dropped to 10% this month, its lowest point since January, while the five-year fell to 8.4% from nearly 5% earlier this year. Falling bond yields mean that their prices are soaring because of their inverse relationship.
South African stocks have also soared, with the JSE Top 40 Stock Index jumping to a high of ZAR 89,130, up by 27% from their lowest levels this year. A closer look at the constituent companies show that most of them have soared this year.
Why the rand, stocks, and bonds are soaring
The South African rand, stocks, and bonds are soaring for several reasons. First, the USD/ZAR exchange rate plunged because of the ongoing US dollar index (DXY) plunge.
The index, which tracks the greenback’s performance against a basket of currencies, has plunged to $98.80. It has plunged by over 10% from its highest point this year.
The US dollar has plunged against most emerging market currencies. For example, the USD/RUB has dropped from 114.50 to 78.9, while the USD/CNY has moved from 7.35 in April to 7.18 today.
South African stocks and bonds, on the other hand, have reacted to the actions of the central bank, which has been cutting interest rates as inflation has cooled.
The most recent data showed that South African inflation moved to 2.8%, within the bank’s target. The central bank slashed rates by 0.25% last week, bringing the lending rate to 7.25%. It has now slashed rates several times since last year.
Lower interest rates mean that South Africans who enjoyed high returns on their money market funds are now earning less. This means that some are starting to rotate to the stock market.
Further, stocks have jumped because of the recent gold price surge that has pushed gold mining stocks like Gold Fields and Harmony Gold much higher this year. Other key commodities like platinum and palladium have also done well this year, boosting their miners.
Budget, GNU, and power progress
The South African rand, stocks, and bonds have all plunged this year because of the progress the government has made in the power sector. While challenges remain, the power blackouts that were experienced a few years ago have improved this year.
Further, the Government of National Unity (GNU) has held steady more than a year after its formation. Analysts hope that it will hold together as the leaders negotiate a budget deal. In a statement, an analyst from Merchant West Investments said:
“But the stricter fiscal spending and pragmatism about where we see the GDP level in future has given the market more certainty that Treasury is realistic and understanding of the need to address spending.”
Still, South African stocks, rand, and bonds face some risks ahead. For one, relations with the United States, a key South African trading partner, have worsened. There is also a risk of profit-taking among investors book profits.
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