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Rand powers ahead on heightened global risks

Cape Town – The rand continued to strengthen on Monday morning after gains it made last week in response to the decision by two rating agencies to keep South Africa’s credit rating unchanged.

The rand gained 0.72% against the dollar at R12.72 and gained 0.8% against the pound sterling at R16.39 by 10:09 on Monday.

“The momentum does seem to be in our favour at the moment and we could see investor buying into riskier assets,” explained Gerard van der Westhuizen, dealer at TreasuryOne.

“The rand has surged forward this morning after news that S&P are keeping our credit ratings unchanged,” he said in a note on Monday. “The agency has kept our ratings at BB+ for foreign credit and BBB- for local credit.

“The move was first initiated by the poor non-farm payroll figures on Friday, which came out worse than expected and the possibility of a rate hike in the US now looking less likely.”

Adding to the rand’s gains on Monday were weekend events that dented the dollar and pound, including a terrorist attack in London and the decision by a four-country alliance led by Saudi Arabia to cut diplomatic ties with Qatar.

Risks to the rand

However, two local risks are in play this week for the rand, explained Rand Merchant Bank analyst John Cairns.

“Fitch and S&P kept SA’s sovereign ratings unchanged last week, but when Moody’s acts, probably on Friday, expect a downgrade and there is even a risk that it could keep the negative outlook in place,” he said.

“Tuesday’s GDP data is expected to show that the economy was in a recession over the turn of the year,” he said.

GRAPH: Rand/dollar intraday moves (Source: Bloomberg)

Geopolitical risks

Geopolitical risks this week will also create added volatility in global currencies, which will impact the rand.

“The peace and quiet will end on Thursday when three major risks converge,” said Cairns.

“The Senate testimony by the fired FBI-director (James) Comey is the most important of the three as it could potentially bring down the Trump administration.

“The UK election will obviously impact on sterling but a good showing by the Labour Party will also rattle global risk sentiment.”  

Bloomberg reports that investors looking for a return of market volatility might see those chances increase this week, with geopolitical risks looming large.

GRAPH: Rand/pound intraday moves (Source: Bloomberg)

UK elections

The pound fell in Asian trading after a weekend terror attack in London killed seven people, days before the nation votes in a snap election.

Sterling declined as much as 0.3% against the dollar. The third attack in the UK in less than three months comes before the June 8 vote, which will be held as armed police patrol the streets in the greatest show of force for decades.

Prime Minister Theresa May’s once 20-point-plus lead is shrinking amid a series of attacks that has threatened to make terrorism the dominant theme of the campaign’s final days.

A surprise victory for the opposition Labour party would, for one thing, augur expansionary fiscal steps that could alter the outlook for UK yields and the pound, while a hung parliament - where there is no majority party - could see a lack of clarity on Britain’s policies for some time.

Qatar ties cut

Saudi Arabia, Bahrain, the United Arab Emirates and Egypt have all said in statements they will suspend air and sea travel to and from Qatar, escalating tensions that started over the country’s relationship with Iran and support of the Muslim Brotherhood.

The move pushed Brent crude up as much as 1.6% in London. The commodity has had a bad year so far, falling 11% on concerns about global supplies. There’s no immediate evidence that shipments from the Persian Gulf will be disrupted, however.

Comey to testify

Comey is set to testify before the Senate Intelligence Committee on Thursday about his conversations with President Donald Trump regarding suspicion of Russian interference in the 2016 election.

The long-anticipated testimony may drive further moves in US equities and the dollar in a reprise of market swings in May. Assets tumbled at the time on news Comey had written a memo alleging Trump made a request to drop an FBI investigation into former National Security Adviser Michael Flynn.

The dollar dropped to levels not seen since the November election while the Dow Jones Industrial Average tumbled more than 370 points, Treasuries rallied the most since July and volatility spiked higher. The benchmark S&P 500 retreated the most since September.

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