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Cape Town – The rand is heading for R14/$ following the decision of Fitch Ratings on Friday to cut South Africa’s sovereign credit rating to sub-investment grade.
BY 10:14 on Monday the rand was trading at R13.93 against the US dollar and although market reaction has been muted (suggesting the downgrade was expected) warning signs are clear, said Andre Botha, dealer at TreasuryOne.
READ: Fitch downgrade is no surprise - analysts
“The scenario that South Africa is faced with at the moment is one where any negative news might be over-reacted upon, such as any political rumblings or bad economic data. The economic data of the past few months was encouraging and expect to see the market to take no notice of good numbers but react on disappointing numbers. The effect of the downgrade will probably only be seen in the medium term and should not be a factor now.
"For now, the main factors are more the political risk that is currently prevalent in the country,” Botha said.
John Cairns, currency strategist at Rand Merchant Bank, said in a company note the market has taken the Fitch downgrade in its stride, presumably because it was widely expected. “But South Africa has lost inclusion in the JP Morgan investment-grade emerging market bond index as a result (of the downgrade).”
GRAPH: Rand vs dollar exchange rate on Monday
Source: Bloomberg
JPMorgan will cut SA from its investment-grade-only EMBIG indexes, which are tracked by $49bn (R677bn) of funds, on April 28. It will also exclude the nation’s debt from its GBI-EM GD and ELMI+ investment-grade-only indexes tracked by $10bn (R138bn) of funds on 31 May.
READ: SA bonds begin trading as junk for first time since 2000
TreasuryOne’s Botha said the current sentiment could result in the rand losing some ground during the week. “A test of R14.00/$ is on the cards, but losses seem to be constrained and should trade in narrow bands, bar any negative news.”
Cairns pointed out that the rand also contends with the sharp rally in the greenback, as the euro/$ pushed below 1.06 on Monday morning – the lowest level in a month amid geopolitical risk aversion and “tough talk” from the US Federal Reserve.
“While we see scope for rand weakness, we do not see another sharp run as likely,” Cairns said. “The stability of late last week probably implies a return to smaller ranges and less extreme moves, provided there are no further major political shocks.”
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