Rand bears keep rushing for the exits even as rate cut looms

Bearish bets on the rand versus the dollar fell to the lowest level this week since before the 2008 financial crisis, even with the South African Reserve Bank (SARB) poised to loosen policy while the Federal Reserve tightens, narrowing the rand’s yield advantage over the greenback.

A glance at the chart below shows why. Having escaped a downgrade from Moody’s Investors Service last week, South Africa offers the highest yield among investment-rated emerging-market countries. And yields could go much lower before that pickup disappears.

That would help insulate South Africa from capital outflows as the policy paths of the SARB and the Federal Reserve diverge, according to Standard Bank Group [JSE:SBK].

Inflows into bonds have reached R16.5bn this year, more than double the R7.2bn in the same period last year, according to Johannesburg Stock Exchange data.

“As long as our inflation premium is sufficient in a disinflationary environment and the South African Reserve Bank anchors rates, we should be able to withstand any foreign selling of bonds,” said Zaakirah Ismail, a Johannesburg-based fixed-income analyst at Standard Bank.

Yields on benchmark government bonds due December 2026 dropped one basis point on Wednesday to 7.9%, the lowest on a closing basis since April 2015. The rand slipped 0.1% to R11.67 per dollar after declining 0.3% on Monday.

Target range

The consumer inflation rate slowed to 4% in February, from 4.4% the month before, and has been within the Reserve Bank’s 3% to 6% target range since April last year. Policy makers will cut the benchmark repo rate by 25 basis points to 6.5% on Wednesday, according to 12 out of 16 economists surveyed by Bloomberg.

After securing its investment grade rating from Moody’s, which lifted its outlook to stable from negative, the threat of an exit from Citigroup’s World Government Bond Index has also receded, giving investors who track the index confidence to hold the debt.