Why foreign exodus has barely budged the rand

While foreign investors dumped South African bonds and equities in the past two weeks at a rate last seen in 2016, the rand didn’t seem to notice.

South Africa depends on portfolio flows to finance a persistent current-account deficit, and with more than 50% of domestic fixed-rate debt in the hands of foreign investors, any reversal should put pressure on the rand - or so the argument goes.

But as outflows mounted, reaching $2.2bn in the 10 days through on Wednesday, the rand gained 1.2% against the dollar.

The last time South Africa saw a similar scale of outflows in a two-week period, in October 2016, the rand weakened 5%.

What’s different this time? The political outlook under new President Cyril Ramaphosa, suggests Henrik Gullberg, the London-based executive director of emerging-market trading strategy at Nomura International.

It’s "somewhat strange" that the rand would strengthen "and would suggest there must be some other inflows not captured in the daily bond and equity flows data", Gullberg said.

“That, and the rand’s relative resilience over the past few weeks compared with peer currencies, would suggest there is still belief in the ability of Ramaphosa to implement change, albeit very gradually.”

The rand’s gain in the midst of an emerging market selloff sparked by rising US rates and a strengthening dollar shows there is more to the rand than portfolio flows, said Alvin Chawasema, a fixed-income trader at Sasfin Securities in Johannesburg.

Slowing inflation and a favourable interest rate differential with developing nations also supported the currency, he said.

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