No breather for the Rand

Yesterday’s current account data made for some interesting reading, but highlighted a very important point. A narrower current account deficit does not guarantee ZAR stability or strength. At the moment, the ZAR can still be regarded a fragile currency, the latest current account data notwithstanding. The fact that it has narrowed highlights that we need to finance less through borrowing from foreigners and that is a more sustainable position to be in, but global sentiment towards Emerging Markets needs to improve, the SARB might need to hike further and the government may need to impose greater austerity in its budget to really turn the tide.

In plain English: It will mean that “SA Inc.” has a tough few quarters ahead and that GDP growth is likely to be particularly weak, but in the absence of finding a way to boost the country’s productive capacity and its exports, the only other way to restore stability is through retrenchment of domestic demand and the effect this has on imports.

Looking ahead, one would therefore caution from suddenly turning overly optimistic on the ZAR on the basis of just the current account deficit. At more than 3% it is still wide and leaves South Africa vulnerable, whilst in the short term the more important variable to determine direction will likely come from the guidance offered by the Fed when it decides on US rates tomorrow.

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