South Africa has been at the forefront of the EM currencies rally. The rand has appreciated by nearly 5 per cent against the dollar since from its low in December – and had a very big day on Wednesday, strengthening by 1.7 per cent. At 7.7 to the greenback, it now stands at its highest level since September.
The latest surge was partly driven by generally-positive local PMI (purchasing manager’s index) data. South Africa’s PMI figure rose to 53.2 in January, above the 50-mark that represents line between expansion and contraction. The PMI had fallen to 49.4 in December – January’s figure was a seven-month high.
But the rally is really based largely on global factors, including PMI data worldwide. As Absa capital wrote in a note on Thursday:
[Wednesday’s] rand appreciation was broadbased and a function of improved international risk appetite due to an improved global growth prognosis. Wednesday’s Chinese, European, American and SA manufacturing data all showed an improvement… rand bulls are taking advantage of the risk-on environment and elevated commodity prices.
On the face of it, the rally is good news. Government debt yields are falling roughly in tandem, based on the dampening effect of an appreciating currency on inflation. Borrowing costs on 10-year debt fell to 7.65 per cent, the lowest for 2012 but still some way from matching 2011′s low of 7.3 per cent in September. With a 2.1bn rand auction next week, this is all good news for the government.
And the rally is not confined to the currency. As beyondbrics reported last week, South Africa’s All-share index is hitting record highs on an almost daily basis. It reached 34,457 on Thursday, putting it on course for an eighth record close in 2012. Mining stocks have led the way, with Anglo American (representing around 9 per cent of the index) rising by around 2 per cent on Wednesday, partly on the strength of the Glencore – Xstrata $80bn mega-merger deal – as Anglo could be another possible deal target.
There may, however, be less positive news for some South African companies down the track.
Gold companies in South Africa gain from a weaker rand because they sell much of their output in dollars and pay most of their costs in rand. The poor performance in the rand in November is expected to assist gold producers when they report quarterly earnings. Harmony, South Africa’s third-largest producer of gold, could gain significantly from a weaker rand as it mines about 90 per cent of its gold in South Africa.
And it’s not just miners. Sasol, the South African petrochemicals group, said its earnings for the first half through December probably rose as much as 90 per cent from a year earlier on the back of higher oil prices and a weaker rand.
If the rally continues much further, these companies may have a less pleasant set of results come mid-2012.
Emerging market currencies off to flying start, FT
S African stocks: record highs – if you’re a local investor, beyondbrics
Fitch puts South Africa on negative, beyondbrics
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