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Rand strength seems 'somewhat divorced' from actual SA sentiment - economist

Dec 28 2019 16:53
Carin Smith

The current strength of the rand appears to be "somewhat divorced" from actual sentiment around the South African economy, emerging markets economist Peter Attard Montalto of Intellidex told Fin24 on Saturday.

The rand closed at R14.1307 on Friday. About 10 days ago, the rand broke below R14.30/$, translating to its strongest performance in four months, according to analysts.

In Montalto's view, investors are just looking to South Africa's "rising carry in a falling carry world". According to Investopedia, a currency carry trade is a strategy whereby a high-yielding currency funds the trade with a low-yielding currency, attempting to capture the difference between the rates, which can often be substantial.

Montalto thinks investors also seem to have some residual hope of "a bounce" in South African equity markets "that seems to be more about valuation than growth itself".
 
Adam Phillips, a treasury specialist at Umkhulu Treasury, told Fin24 on Saturday that, early in December the rand was hit on the back of Eskom's woes.

He points out that, however, possibly the most important issue dominating markets throughout the year was whether the US and China could come to some sort of trade agreement.

"With the agreed phase one document (of the trade agreement) coming out soon, the rand has benefitted like other emerging market currencies. The hunt for yield and lack of import interest has also helped," explained Phillips.

Sanisha Packirisamy, economist at Momentum Investments, is also of the view that the recent rand strength can be attributed to the recent reprieve in the trade war between the US and China.

"The US administration delayed the imposition of 15% duties on US$156 billion worth of Chinese imported goods. This has increased risk appetite towards emerging markets," she told Fin24.

"On a month to date basis, the biggest emerging market currency appreciations against the US dollar have been in the Chilean peso (8.5%), Colombian peso (6.5%), Brazilian real (4.7%) and the rand (4.6%)."

Bloomberg reported earlier on Saturday that South Africa's trade surplus widened in November as the value of imports of equipment components and chemical products decreased.

Phillips cautioned that the rand's fate could, however, change in February or March after the announcement of the National Budget by Finance Minister Tito Mboweni.

Moody's rating

Ratings agency Moody's, the only ratings agency still having South Africa at investment grade, is expected to give its next review at the end of March 2020.

At the beginning of November, Moody downgraded the outlook for its credit rating of the South African government from "stable" to "negative". This is the final step before it strips SA of its "investment grade" Baa3 long-term foreign-currency and local-currency issuer rating, which will leave it at "junk".

"The negative outlook signals in part Moody's rising concern that the government will not find the political capital to implement the range of measures it intends, and that its plans will be largely ineffective in lifting growth," the agency said in a statement at the time.

According to Phillips, it is a guess as to whether offshore fund managers have hedged out their SA positions. If Moody's also downgrades SA to junk, then global investment funds would be forced to sell off SA bonds.

"Judging by the six-month implied volatility level, it seems likely that a majority (of fund managers) might have hedged their positions should a downgrade take place," said Phillips.

"This could mean a mild weakness in the rand, although updates on Eskom and other state-owned enterprises will cause nervousness."

Montalto said the increasing view in the "endless and rather dull debate" over whether a Moody's downgrade end of March is being priced in or not, is that it is being priced in.

"(This) is giving carry-hungry-hippos some comfort, but I don't believe still a non-linear event can truly be priced, nor the deeper impacts of a downgrade into business sentiment, even if a downgrade itself would see markets react in an orderly manner without sever dislocation," said Montalto.

Ratings agency Fitch in a recent note affirmed SA's long-term foreign and local currency debt ratings at 'BB+' - one notch below investment grade - and maintains a negative outlook. According to Fitch, South Africa's ratings are constrained by low growth potential, high and rising government debt, large contingent liabilities as well as the risk of rising social tensions due to extremely high inequality.


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