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Rand gains on Mugabe exit and CPI dip, but momentum constrained

Johannesburg – The rand is unlikely to maintain the momentum of its gains following news of Zimbabwean President Robert Mugabe's resignation, according to analysts.

The currency dipped below R14 to the dollar, trading as low as R13.98 to the greenback on Tuesday evening.

But Gerard van der Westhuizen, dealer at TreasuryOne, explained that expectations of inflation, the monetary policy committee’s (MPC's) interest rate announcement on Thursday and rating agencies Moody’s and S&P’s reviews - set to come out on Friday - all have a bearing on the local unit's ability to strengthen.

The rand opened at R13.96/$ on Wednesday morning. Following reports that the consumer price (CPI) for October eased to 4.8%, it firmed to R13.92/$ and was trading at R13.87 by 10:15.

Van der Westhuizen expected a "knee-jerk reaction" on CPI figures, and believes it will not influence the MPC's rates decision on Thursday. He warned that the currency remains volatile, but should stay within range.

RMB currency economist John Cairns added that despite gains from developments in Zimbabwe, the key issues impacting the currency are SA-specific which could restrict it from making further gains.

“The resignation of Mugabe possibly opens the way for an economic revival in Zimbabwe, which was once a meaningful trade partner for South Africa.

“There is, however, a long road to tread and we are far from sure that the new authorities will necessarily follow a democratic and economic path that would boost South Africa. As such, do not expect a sustained rand rally on last night’s developments,” said Cairns.

Downgrade risk

A poll of 25 economists by Reuters indicated that the rand could weaken 5% in the case of a downgrade on Friday, said Cairns.

Investec chief economist Annabel Bishop is of the view that the downgrade could happen within the next six months. “We expect a Moody’s downgrade to Ba1 on the foreign, and so local, currency front on 24th November,” she said in a report.

The downgrade would lead to rand weakness, higher bond yields and weaker GDP growth, she explained.  

“If SA does not see S&P and/or Moody’s lower the remaining investment grade credit ratings to sub-investment grade in November 2017, it could occur by the end of the first half of next year should the ANC elective conference outcome be negatively perceived by the markets,” she added.

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