Since Jacob Zuma’s infamous willy nilly firing and hiring of Finance Ministers in November last year South Africa’s currency weakened drastically – so much so that people who don’t protest did.

But at R14.22 to the dollar this morning, the rand is strengthening – and fast.

By 1600 GMT (yesterday) the rand had gained 0.21 percent to 14.2350 per dollar, extending a two-week run that has seen the unit strengthen nearly 7 percent and break through major resistance points towards the sub 14.00 mark, a level it last touched in mid-November.

While no one expected the increase because South Africa is nearing junk status – not even experts – analysts do, however, believe that the relief will be short-lived due to low economic growth and a volatile political environment. Especially now that elections are on their way:

The broad All-share index advanced 0.77 percent to 53,789 points to a one-month high, while the benchmark Top-40 index rose 0.52 percent to 47,271 points.Trade was on par, according to preliminary bourse data, with about 275 million shares changing hands, slightly lower than last year’s daily average of 280 million.

So why the increase?

How much of this recovery can be attributed to South African specifics (better news about the political state of SA) and how much can be attributed to global forces (less risk priced into emerging market currencies bonds and equities of which SA is so much a part of)? The answer is that to date almost all of the improved outcomes registered on the JSE and in the exchange value of the rand is the result of less global, rather than SA, risk.

If South Africa was appreciated more regarding economics on an international scale, the value would increase considerably. But will it, or will it tank even more?

What will happen if / when South Africa enters junk status?  Who knows? That’s why it’s always better to leave it to guys like Consequence, who are up to speed with the market and its unpredictable ebbs and flows.

But right now, before the rand devalues over another political crisis, you should probably import products from overseas at a real good price – like these or this. Here’s what Brian Kantor had to say on the economic effects of Brazil’s political atmosphere:

A comparison of risk spreads attached to Brazilian and SA debt made below, shows how Brazilian credit has benefitted both absolutely and relatively to SA from the prospect that its President will be forced out of office. It should also be recognised that both Brazilian and SA debt are currently trading as high yield bonds. Investment grade bonds offer up to about 2.7% p.a more than five year US Treasuries.

While it’s all very well telling us this after the event, it would have been nice to know a little earlier. We could have been billionaires already. Here’s the bad news:

They reveal that the rand is still expected to weaken by about 7% p.a against the US dollar – implying consistently high rates of inflation in SA over the next 10 years.

But there’s also good news:

There remains every opportunity for SA to prove that the markets are wrong about the inflation and exchange rate outlook, with policies that convince the world that we will not be printing money to fund government spending and that our policies will be investor friendly.

[source: ewn&fin24]