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Cape Town – An American airstrike on a Syrian military target shielded the rand from any depreciation on Friday, following Fitch’s downgrade of South Africa's unsecured foreign currency and local currency bonds to non-investment grade (BB+) on Friday.
READ: Fitch downgrades SA to junk status
Additionally, the market had priced in another rating agency downgrading South Africa to junk status (BB+), following the shock move by Standard & Poor’s (S&P) on Monday evening. Moody’s also placed South Africa on downgrade review, but its current rating of the country is two notches above junk.
Following news of the downgrade, US non-farm payroll numbers surprised with only 89 000 jobs being created in March compared to 180 000 expected, according to Treasury One. This also helped the rand remain stable.
The rand moved in a range between R13.72 and R13.82 to the dollar and will likely stabilise in this region, analysts believe.
Moody’s, Standard & Poor's and Fitch cited political instability and economic policy uncertainty in their decisions this week, following President Jacob Zuma's Cabinet reshuffle last Thursday which saw the removal of Pravin Gordhan as finance minister.
“What’s going on in Syria is even more important,” said Umkhulu Consulting analyst Adam Phillips on Friday. “Also, a lot of people priced in the movement of junk status, which is why the moves in the rand are small.”
GRAPH: Rand vs dollar on Friday
Source: Bloomberg
Treasury One currency analyst Wichard Cilliers told Fin24 that the downgrade has been expected.
“Although Moody’s pushed back on their announcement on Friday, everyone anticipated that South Africa would get a further downgrade. As such, the bond and currency has been priced as junk already.
“The big surprise was when S&P downgraded South Africa.”
Cilliers said the dollar is under pressure because of the 59 US cruise missiles which targeted a military base in Syria. Russia responded by suspending a deal with the US to prevent mid-air collisions over Syria.
“Gold jumped 1.5% from last night,” said Cilliers. “The dollar is under pressure from other currencies and emerging market currencies are stronger, except for the rand, which has remained flat.”
FULL STATEMENT: Fitch explains SA downgrade
Cilliers said the anti-Zuma march, which has seen thousands of South Africans protest across the country on Friday, has not had an impact on the currency at the moment.
“Everyone takes note of the march, but the market realises it won’t cause Zuma to resign or the ANC to vote in favour of no confidence,” he said. “The march is very good for the country and maybe in the longer term it will be good, but it doesn’t have an impact today.”
He sees the rand remaining under pressure for the foreseeable future. “We won’t see levels dipping below R12.80 to the dollar any time soon.”
Cilliers expects Moody’s to downgrade South Africa to junk status in one to three months’ time.
While Fitch downgraded South Africa’s local long-term currency bonds to junk status on Friday, S&P and Moody’s have not.
READ: Fitch downgrade is no surprise - analysts
Cilliers said the big change in the currency will be when S&P and Moody’s downgrade this specific bond to junk status, as these are the ratings that impact the Citi World Bond Index.
South Africa has between $10bn and $11bn worth of bonds on this index, which tracks and invests in over $3trn worth of bonds.
Once these bonds are rated junk by S&P and Moody’s, Cilliers expects “massive outflows from the country”.
“This will see the currency weaken dramatically,” he said. “The rand could go over R14/$ very soon and maybe to R15/$ in the next few months, especially if Moody’s downgrades South Africa.”
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