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Cape Town - The rand received a double dose of good news on Friday to trade at its lowest level this month at R15.10/$.
The local unit received an unexpected boost on Friday afternoon from a dismal May jobs report out of the US.
At 17:19 the rand was trading at R15.29 against the greenback from R15.57 before the US Labour Department released the data and ahead of the long awaited Standard and Poor's (S&P) credit ratings assessment.
“After the poor US non-farm payroll print, the chance of an interest rate hike in June has come down from around 80% to 30%. This has really put the dollar on the back foot today," said Wichard Cilliers, chief currency dealer at TreasuryOne.
“Currencies globally are benefiting from this."
US non-farm payrolls showed only 38 000 jobs were added in May versus 164 000 expected. The US unemployment rate was down to 4.7%.
S&P announced just after market close on Friday that it kept South Africa's investment grade unchanged, with the outlook still negative. The rand immediately started to strengthen to trade at R15.10/$ at 18:30.
"We saw a bigger move after the very poor US non-farm payroll numbers," said Cilliers. "I don’t think anyone expected them to be that low. There cannot be a hike in June or July now."
Adam Phillips of Umkhulu Consulting said the S&P announcement was more relief than good news.
"We have had a reprieve and there is still a great deal of work to be undertaken on the economy in general. We will get a better indication with regards to the rand on Monday when all SA corporates get involved.
Phillips said that for the rand to go below R15/$ he would have to see the foreign buying of bonds. "Unfortunately, I think they can afford to watch for the moment."
Phillips said he thinks the upside is capped for the moment, but R15/$ is a crucial psychological and technical support level.
"The key will be liquidity, whether margins become narrower on trading desks at banks and whether local bonds can follow through and perform even better. It would also be good to see implied volatility come down, but I think that could be a wish too far! One also needs to watch where the yen is going, as that will be the most important currency to watch for the rest of the month."
Where S&P sees risk
S&P said in a 13-page assessment it affirmed SA’s long and short term foreign and local currency bond ratings at ‘BBB-/A-3’ and ‘BBB+/A-2’ respectively.
The foreign currency bond rating remains one notch above sub-investment grade, whereas the domestic currency bond rating remains three notches above subinvestment grade.
Among the risk factors S&P listed were:
• low GDP growth is putting South Africa's economic metrics at risk and could eventually weaken the government's social contract with business and labour; and
• Rising political tensions are accentuating vulnerabilities in the country's sovereign credit profile.
Still, it said, energy sector improvements will likely reduce some of the economic bottlenecks and pending finalisation of labour and mining reforms could engender a positive confidence shock.
S&P maintained the negative outlook on the rating, citing concerns about economic growth and warned it could lower the rating by year-end or next year if policy measures do not turn the economy around.
Alternatively, S&P could revise the outlook to stable if they observe policy implementation that leads to an improved business confidence environment and increased private sector investment and ultimately result in higher levels of growth.
National Treasury welcomed S&P’s decision, saying the benefit of this decision is that South Africa is given more time to demonstrate further concrete implementation of reforms that are underway. These are aimed at achieving higher levels of inclusive growth and place public finances on a sustainable path.
Treasury said the government is aware that the next six months are critical and there is a need to step up the implementation of the nine-point plan and other measures to boost the economy.
It said government, business and labour will collectively intensify efforts aimed at:
i) Restoring confidence and boosting investment amongst local and international investors;
ii) Unblocking obstacles to faster employment growth in key sectors; and
iii) Undertaking fiscal, State-Owned Companies (SOCs) and regulatory reforms.
