Cape Town - Currency traders are expecting volatility in the rand exchange rate to increase during the course of Wednesday as South Africa draws closer to the National Budget Speech.
The rand might trade slightly weaker as markets start to worry more about the budget deficit and how President Cyril Ramaphosa’s new leadership aims to turn the ship around, said TreasuryONE dealer Gerard van der Westhuizen.
The expected range for the day is R11.65 to R11.85 to the US dollar, with the rand trading at R11.69 to the dollar at 10:37 in Johannesburg. The day's range so far is betweenR11.6951 and R11.7825.
The rand was still trading at R11.73 against the greenback when Statistics South Africa released consumer price inflation (CPI) data on Wednesday.
CPI came out at 4.4% in January 2018, in line with expectations and down from 4.7% in December 2017. This was mainly due to a drop in the fuel price.
According Stats SA, the headline CPI annual inflation rate of 4.4% in January 2018 for all urban areas was 0.3 of a percentage point lower than the corresponding annual rate of 4.7% in December 2017.
On average, prices increased by 0.3% between December 2017 and January 2018.
Globally the dollar has continued its short-term rally after a series of losses from January.
"This could be a technical recovery as fears regarding a weaker dollar policy from the US still loom," said Van der Westhuizen.
For now the focus has turned to Finance Minister Malusi Gigaba's Budget Speech expected to be delivered at 14:00 on Wednesday.
RMB currency strategist John Cairns said a lot has already been priced in, but a budget that matches market expectations would allow for further gains.
"Expect volatility immediately after the 14:00 media embargo, with dollar/rand moves of 20 cents or even more," he said.
"The market expects and requires a credible budget that gets government finances under control.
"To be credible, the underlying economic growth assumptions need to be conservative, while at least some of the tough action in terms of tax hikes and expenditure cuts need to be taken immediately rather than back-loaded in the outer years."
Cairns said the market will care more about the numbers than how they will be achieved but would be encouraged by, and probably even assumes, a VAT hike.
Pushing this through will be one of Ramaphosa’s first real economic tests, he said.
"Focus will be on how the matter of free higher education is dealt with and then there’s the thorny issue of government salaries - although this will not be directly addressed in the budget,"he said.
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