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Cape Town - The extent of the rand’s gain was surprising given the tone of rating agency S&P’s statement that “strongly suggested the bias is still for a downgrade”, said RMB analyst John Cairns on Tuesday.
“The extent of the rand gains surprises us somewhat. The tone of S&P’s statement strongly suggested the bias is still for a downgrade. And December is still the call, even if the S&P analyst suggested this was not assured when speaking on our client conference call late yesterday.”
The rand, which broke the psychological barrier of R15/$ on Monday, was trading at R14.92/$ at 08:20 on Tuesday. Domestic bond prices also reached the highest level so far this year.
Cairns said most of Monday’s “rand gains can be seen as a follow through from the rating decision, but weakness in the dollar and a risk-on environment have also helped”.
US Federal Reserve chair Janet Yellen gave a mostly positive view on the economy on Monday night, said Cairns, “warning not to put too much emphasis on one jobs report, while giving no suggestion that the Fed was in a rush to raise rates”.
Cairns said the US/rand exchange rate dropped nearly 5% since Friday. “Around half of this can be seen as rand gains on the S&P decision and the other half dollar weakness on the payrolls report,” he said, citing news that the US saw a net addition of only 38 000 jobs in May.
RMB analyst Deon Kohlmeyer said on Tuesday that people could be “forgiven for thinking that the recent rand and bond rally had everything to do with the positive S&P decision”.
A bigger picture is unfolding
“But truth be told, a bigger picture is unfolding and it has had more to do with the surprisingly weak payroll number on Friday and the fact that the potential Fed hike in June is off the table and that even July now seems remote,” he said.
Cairns said the event risk is low on Tuesday, leaving the markets to absorb the news from the past few days. “For the dollar this probably implies some residual volatility,” he said. “For the rand, the call is between momentum and overextension: momentum may be the winner initially, but overextension will probably win in the end.”
NKC African Economics said on Tuesday that while the “rating reprieve was welcomed by government, Fitch is also due to issue rating update this week, while real GDP data is set to be released on Wednesday that should provide clearer picture of South African economy”.
Kohlmeyer said bonds “naturally followed the rand strength lower, but the R186 is again faced with the daunting task of breaking through the 9.00% level that has previously held very well”.
“The fact that we have an auction today will go a long way to provide evidence as to whether real money investors are prepared to put money to work at these lower levels and that bonds still have further downside potential,” he said.
An economist said countries like Mexico and SA always strengthen after a weak non-farm payroll number and then within a week start weakening again, Umkhulu Consulting’s Adam Phillips explained on Tuesday.
“However, I think he (the economist) is not taking into account the S&P news and even though local bonds did not improve yesterday, I think we have to give Finance Minister Pravin Gordhan and the National Treasury a fair chance at this stage,” he said.
