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[TOP STORY] What’s driving the rand post Sona?

Anchor Capital estimates the finance minister has just under a R100bn more than he was expecting in the coffers. ‘That buys him flexibility’ – Co-CIO Nolan Wapenaar.

SIMON BROWN: I’m chatting with Nolan Wapenaar – the co-chief investment officer at Anchor. Nolan, I appreciate your time. I need to timestamp this. We are recording late on Friday afternoon. You sent a note out earlier in the week around our currency, and there’s so much to spook it. We’ve got Covid variants. We’ve had Sona (the State of the Nation Address). There is the budget in two weeks’ (time). Yet the rand started the week about R15/dollar and, as we sit here, it’s R14.60/dollar. What’s driving our currency, even with these fears out there?

NOLAN WAPENAAR: Simon, good afternoon. And thank you very much for inviting me back on your show. As we said in our note, and as we’d suggested, the rand is going through a volatile period. We have a lot of potential surprise events coming up. However, the broader environment continues to be rand-positive, or at least supportive of the rand. And we’ve seen that play through in the last week, where we’ve seen strength, notwithstanding Sona. And in fact, through Sona. 

If we then look on the domestic front, the domestic situation also is actually quite supportive, where the terms of trade continue to be in our favour. And what I really mean is South Africa’s main import (?) is oil, and the oil price Brent is around $60/barrel, it’s where it was a year ago before the initial Covid spike. Contrast that to our export commodities, which have been booming. And now we are seeing significant trade surplus for the rand itself. 

The combination of a supportive domestic environment and the supportive global environment means that in the near term the rand continues to be well supported. It continues to track stronger, notwithstanding the significant risks that our country does place. 

SIMON BROWN: Yes. And that is often the currency. We look out of the window, we see load shedding, as you’ve mentioned, the Sona, and so on. And when a finance minister gets fired, then there’s a singular event and it’s a South African-driven event. But the rand typically is moving on global issues as well as local. And those global might be sort of counter to what’s happening internally, notwithstanding there being some revenue pickup and the like within South Africa.

NOLAN WAPENAAR: That is true. We often say that 70% of what drives the value of the rand takes place outside our borders, off our shores. And it’s the global environment. That being said, that 30% has been quite positive as well of late. We’ve seen good tax collection numbers which were published through to December. And that gave a significant impetus for our bond market to actually rally quite strongly. And in that context, we’ve seen a lot of foreign buying of our bonds. 

If you look at the microcosm of the last just two weeks, it’s a very short period, but the rand has actually strengthened relatively well, relative to its peers as well. And there’ve actually been some significant idiosyncratic events that have been quite positive for us.

SIMON BROWN: So those events – you mentioned the revenue collection. As I understand the data, we are sort of R100 billion ahead of where we thought we would be. That’s a big number. I mean, it’s still going to be a tough budget, but that remains a really, really big number and gives Minister (Tito) Mboweni a lot of wiggle room come the budget on February 24 (date yet to be confirmed).

NOLAN WAPENAAR: It does indeed. I think that number surprised us. But yes, our calculations are that Minister Mboweni has just under R100 billion more than he necessarily was expecting to have in the coffers. That buys him flexibility. We know from the Sona that some of that R100 billion is going to be spent on extending grants, which is necessary. I think from a humanitarian side we don’t have a choice. It’s the right thing to do. 

That being said, he’s still got a significant amount of cash available. Some of that obviously needs to finance the vaccines. And with both of those sort of paid for, we still calculated that he’s probably got R40/50 billion of change left, and that’s a significant amount of money that he can use to manage his way through a tough period.

SIMON BROWN: Your target is around the R14.50 to R15/dollar range. Notwithstanding the speed that it’s coming into that range, are you expecting it to stay around here? I appreciate the rand is volatile and it can shoot either way, but is this the sort of comfort zone for our currency in the next couple of weeks, maybe months, ahead?

NOLAN WAPENAAR: Very much so. In any 12-month period, the rand typically trades about the R2.50 range top to bottom, where in a volatile period it might be more. So the rand is going to shoot out of that range. It might shoot to the low side, it might shoot to the high side.

But our comfort zone, our feeling of where the rand should be, absolutely it’s R14.50 to R15/dollar.

And that means that we are saying to clients right now in our investment portfolios we are probably neutral towards the rand. We’re not rushing to buy dollars, but equally, we’re certainly not bringing money onshore at this stage.

SIMON BROWN: We’ll leave it there. Nolan Wapenaar is co-chief investment officer at Anchor Capital. Nolan, I  really appreciate your time.

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