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Cape Town – A drop in performance in Asia and a fall in the oil price pushed the rand nearly 1% down to R14.85/$ on Tuesday.
“Despite the New York equity markets being flat, we have seen steeper falls in the Far East and this has caused the rand to move back into the R14.80s,” said Adam Phillips of Umkhulu Consulting on Tuesday.
“Also, we have witnessed some falls in the oil price and US bonds coming under pressure. Emerging market currencies are strongly correlated to the oil price this year, especially as the Iranians don't want to cut production until they are back at pre sanction levels.”
Oil continued to slide on Tuesday, with Brent dropping to $37.60 per barrel. Rand Merchant Bank analyst John Cairns said further downside moves would risk spilling into rand weakness. “Asian markets were already displaying some signs of risk aversion this morning,” he said on Tuesday.
Cairns added that the market rally has run its course following the Constitutional Court's Nkandla judgment against President Jacob Zuma.
“The rand underperformed slightly yesterday, our offshore debt spreads have stopped tightening and foreigners have turned neutral on our domestic assets,” he said. “Expect local politics to again act as a slight drag on the rand, pending further developments. Today’s impeachment debate should have no impact.”
Phillips said the market knows the answer to Tuesday’s vote of no confidence into Zuma, which will fail due to the ANC majority in Parliament. “(On that basis), I would watch the general feeling to emerging market currencies,” he said. “If they get hit today then the second division rand will be hurt.”
Phillips warned: “Political and economic woes add up to a lower currency until the damage can be corrected.”
RMB believes the comments in Monday night’s Monetary Policy Review were hawkish.
Cairns said the SA Revenue Bank’s (Sarb's) “worries over the inflation outlook suggest the risk of another rate hike is high, although we think the deterioration in local growth data over coming months will cause them to shift their heightened focus on inflation towards GDP growth”.
Sarb said “a downgrade (to) below investment grade is likely to increase short-term rates by 80 basis points. Long-term bond yields would be expected to move more, rising by 104 basis points.”
Cairns said most of this is already in the price. “We know our offshore yields are already trading at levels consistent with junk,” he said. “We cannot measure how much of a downgrade is priced into the rand. Our guess is most, but not all.”
