Rand facing Covid-19, political risks in 2022

• By Donna Slater

ALTHOUGH the rand ended 2021 “on the back foot” at R15.89/$, the Omicron variant of Covid-19 will remain a significant unknown in the financial market for 2022 as it is proving to be more transmissible but less severe than earlier variants, reports South African financial services solutions company DG Capital Foreign Exchange MD Ryan Booysen.

He says, however, that three shots of the Pfizer-BioNTech vaccine have been shown to neutralise the Omicron variant in a laboratory test, thereby providing early evidence that booster shots could be key to protection against infection from the newly identified variant.

Meanwhile, any possible market headwinds will come from the US economy, which is experiencing runaway inflation, the highest in decades, for longer than expected, he points out. This has drastically altered the market’s expectation after the US Federal Reserve doubled down on its stimulus tapering and plotted three interest rate hikes this year.

“The tapering will ultimately reduce the liquidity in the market and riskier assets will be the eventual victims, posing a downside risk for the Rand, he says.

As for oil, Booysen says there is no consensus on the outlook for the oil price among traders at the moment. “With a global economy expected to start moving out of pandemic mode, implying increased oil demand, being offset by the rise in US production which could create a surplus, the bulls are taking on the bears in the oil market.”

As such, financial services company JP Morgan is predicting an oil price closer to $125/bl. “But if the US supply does ramp up, we could see the actual number fall far short. Demand will also be greatly affected by the pace at which the global economy can start accelerating and enter a post-pandemic phase,” he says.

Nonetheless, Booysen says China’s rate of economic growth and its demand for commodities will also be key to the rand’s fortunes this year, as the country’s ability to sustain its growth trajectory will ultimately decide the duration of the current commodity bull cycle.

“Commodity producing economies, including South Africa, will be influenced greatly by this with an ultimate impact on the rand. The stronger the commodity cycle, the more supportive it will be for the local currency,” he says.

A final risk to the rand on the global front lies with Turkey, as the rand trades as a proxy for the lira during highly volatile periods. In this regard, lowering interest rates in the face of high inflation has been contrary to globally accepted economic practices and has meant that the lira was by far the worst performing currency globally in 2021, weakening over 40 percent during the year, says Booysen.

Diminished trading in December, he says, kept the rand under pressure too. “We could see some rand strength once those rand shorts are unwound, but we will not see too much unless the lira also strengthens again.”

South Africa’s terms of trade have been in positive territory for the better part of the pandemic owing mainly to two factors – the oil price being under pressure because of the low demand during the pandemic; and a commodity bull cycle, driven by the Chinese hunger for South African exported metals.

“Together, these have put the South African trade account in surplus territory since the first half of 2020. While this effect has started to wane with the commodity bull-run taking a breather and global oil prices recovering, we are still in positive territory and could remain there if oil prices do not rally,” says Booysen.

Political tensions will also play a key role in the rand’s stability this year, with implications of the State capture report and court action regarding former President Jacob Zuma weighing on the possibility of unrest, which in turn, may affect the rand’s value.

“All-in-all, we are looking at a rand that is likely to remain under pressure during 2022.

“With a number of two-way risk factors in the market though, there could be periods of rand strength, but the fragile state of the South African fiscus could limit the potential of broad-based rand strength in the year to come. We expect the rand to trade in the R14.75/$ to R17.50/$ range in 2022,” concludes Booysen.