Ever since August, most currencies have taken a knock against the US dollar, mainly due to the looming end to the long-standing policy of monetary accommodation in the US. This has predictably led to higher yields on 10-year Treasury bonds, which have increased by more than 500 basis points since the beginning of August.
In addition to the higher bond yields in the US, the return to a risk-off sentiment amongst fund managers was fueled by concerns over surging energy prices and a slowdown of the pace of global economic recovery, especially in China.
Calmer waters
Fortunately, a large measure of calm returned to the foreign exchange market during December, with an average strengthening of 0.8% against the US dollar for 16 of the 17 currencies tracked by Currencies Direct. These include the Euro, the British pound, the Australian dollar, and the currencies of the world’s key emerging markets.
South America was the only region that continued to experience declines against the greenback during December, but they were marginal. The Brazilian real lost less than one percent of its value, whilst the Chilean peso and Argentine peso depreciated by less than 2%.
The rand clawed back some of the losses inflicted on most key currencies by a US dollar that had been rampant during the second half of the year. South Africa’s currency ended the year 1.3% stronger than a month earlier, despite US Treasury yields having risen to a five-week high.
The rand’s performance since the onset of the Covid pandemic has been quite spectacular, gaining more than 19% against the greenback between 6 April 2020 and 31 December 2021. Only the Mexican peso and the Australian dollar managed marginally better performances over this period. In sharp contrast, the Argentine peso and Turkish lira have lost 37% and 40% of their value, respectively, over the past 21 months.
Reasons for the superior performance of the rand amongst its emerging market peers are not difficult to find. They include a substantial improvement in the South Africa’s macroeconomic fundamentals, especially a reduction in the fiscal debt/GDP ratio, relatively low inflation and record exports.
Bumper exports
The latter amounted to more than R1.5 trillion during the first eleven months of the year, representing an increase of 33% over the figure for 2020. As a result, the cumulative trade surplus between January and November has more than doubled to a level of R316 billion.
In addition, South African bonds have come out tops in the 2021 Bloomberg ranking of 46 key global markets, returning 8.7% to investors. China came second with a return of 5.6%, with Indonesia claiming bronze with 5.2%.
Combined with the welcome news that Fitch Ratings has upgraded the outlook for South Africa’s public debt from negative to stable (within the level of BB-), the Bloomberg ranking represents a huge advertisement for inward portfolio investment.
Once global fund managers start doing their homework, they will also realise that several blue-chip companies on the JSE offer exceptional value in terms of low price/earnings ratios and high dividend yields, especially in the sectors for mining, resources and real estate investment trusts (REITs).
From a balance of payments perspective, the rand is likely to remain fairly stable in coming months, but a surge in US interest rates may induce bouts of volatility.