Publications
Partners
Cape Town - The monetary policy committee (MPC) of the South African Reserve Bank (SARB) will probably convey a hawkish tone on Thursday, which could help the rand move lower, Phillip Pearce, a dealer at TreasuryOne, said ahead of the rates announcement.
In his view, the possibility of rating downgrades on Friday will, however, cause the rand to trade sideways between R13.78 and R13.95 to the dollar.
He pointed out that the inflation figure for October was lower than expected at 4.8%, which gave the rand further momentum to move lower.
"The slowing inflation number should put the SARB at ease, and it is widely expected that they will leave rates unchanged," said Pearce.
"A lot can happen in a week in the currency market, and by the looks of it, a lot can be forgotten. Last week markets were jittery on the prospects of a downgrade by S&P or Moody’s, and here we are a day before the rating announcements and markets are complacent as ever."
He explained that the developments in Zimbabwe helped the rand break the 14/$ level, and that dollar weakness has helped the local unit trade to a low of R13.83/$. Foreign inflows into SA's bond market worth R1.27bn maintained the rand’s momentum lower.
Factors
RMB economist Ilke Van Zyl said since its annual low last Tuesday, the rand has appreciated by 3.4% on a nominal trade-weighted basis.
She explained that several factors have contributed to this.
"Despite the US Fed minutes signalling a 'near-term' hike, most members remain cautious on low inflation. Accordingly, a slight emerging market (EM) risk boost has sent EM currencies stronger this morning.
"SA’s commodity terms of trade have crept into positive year-on-year territory again over the past two days, also boosting the local unit. While it feels overdone, remember that the dollar/rand was trading around R12.80 to the dollar in early September," she added.
RMB remains cautious given what Van Zyl calls "the significant idiosyncratic risks on the horizon", of which rating agencies' reviews on Friday are the most important.
"A potential $10bn can be heading for the door," said Van Zyl.
"Although Finance Minister Malusi Gigaba made mildly positive noise in Parliament yesterday, saying government will push through spending cuts of R25bn and raise revenue by R15bn in the February 2018 budget, this won’t meaningfully impact the decisions of the rating agencies."
RMB also expects the MPC to keep the repo rate unchanged on Thursday.
"While the decision should not have a meaningful bearing on the currency, the tone can be slightly less hawkish than what markets are currently pricing," said Van Zyl.
"A January 2018 hike is still priced. In the light of yesterday’s lower CPI print, the real policy rate remains well supported and will continue to climb into year-end."
She sees public sector wage demands as one of the risks brewing on the horizon.
Challenges for monetary policy
Momentum Investments economist Sanisha Packirisamy said that although inflation has remained within the target range of between 3% and 6%, the current environment has created challenges for monetary policy.
The mini budget in October projected a widening of the current account deficit from 3.1% of GDP to 4.3%, indicating an “easier fiscal stance for the medium term", she said.
“Fitch rating agency was displeased by the shift away from fiscal consolidation. This was followed by a response from Moody’s, which suggested that debt sustainability would be at risk, unless a more credible fiscal consolidation plan was revealed at the time of the February 2018 national budget.”
Additionally, inflation expectations still remain close to the upper end of the target range, said Packirisamy. “The SARB has expressed its preference for expectations to settle closer to the midpoint of the 3% to 6% inflation target band to reflect a higher degree of monetary policy credibility.”
These challenges limit the chances of further rate cuts in the short term. Packirisamy said rates could be cut in the medium term, if the currency remains “well behaved” and inflation forecasts stay within the target band.
By late morning on Thursday the rand was trading at R13.84 to the dollar.
* Sign up to Fin24's top news in your inbox: SUBSCRIBE TO FIN24 NEWSLETTER
