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Cape Town - The mighty rand continued its rally on Thursday, dipping below R12.50/$ for the first time in 20 months as it refused to follow the general risk-off sentiment.
By 16:45 the local unit was trading 0.57% firmer at R12.49/$ from an overnight close of R12.56. It touched R12.48 to the greenback earlier in the session.
Phillip Pearce, Dealer at TreasuryOne, said the local unit drew support from strong economic indicators released on Wednesday as well as a weaker dollar to outperform emerging market peers over the past few days.
Local current account data for the 4th quarter of 2016 came in at the narrowest level since 2011 "and surprised everyone". Local inflation data also printed lower at 6.3% from the the previous 6.6% in January.
He said the dollar faces further challenges as the House of Representatives vote on the Health Care Bill on Thursday which will test US President Donald Trump’s leadership. Federal Reserve chairperson Janet Yellen is also expected to speak on Thursday.
"The equation is simple, if the bill doesn’t pass, tax cuts will be delayed which leads to markets fearing Trump's pro-growth policies are all talk and no walk. If the bill doesn’t pass, US equities and the dollar will take the knock.
"Markets will pay more attention to Yellen though, with caution possibly paid before the speech."
Pearce said momentum certainly favours further gains in the rand, "but I think many are asking how much further the rand can go".
If the Health Care Bill doesn’t pass, then the answer is a lot lower, he said.
SARB data released on Wednesday showed that the current account deficit narrowed to 1.7% of GDP in 4Q16, from 3.8% in 3Q16, bringing the average for the year to 3.1%, from 4.1% in 2015.
“This is a welcome development for an economy thirsty for positive news,” said RMB currency analyst Isaah Mhlanga.
He, however, cautioned that the underlying trends still depict a weak economy.
“The improved trade balance reflects weak imports due to lack of local demand for intermediate goods, while the improved exports reflect better export prices rather than outright growth in export volumes. The income balance also moderated but this can quickly reverse.”
Mhlanga said Stats SA figures also showed that headline inflation print for February moderated to 6.3% y/y from 6.6% in January, while core inflation printed at 5.2% y/y from 5.5%. “Combined with the current account figures and stronger rand, this should prompt the SARB to revise their inflation forecast down and move to a more neutral stance from their hawkish bias.”
