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Surprise rate cut is no death knell for resilient rand

Jul 21 2017 08:59
Paul Wallace and Neo Khanyile, Bloomberg

Johannesburg - South Africa’s first interest rate cut in five years, and a surprise one at that, probably won’t be enough to break the rand’s resilience.

The currency fell after the South African Reserve Bank reduced its key rate on Thursday to 6.75% from 7% to boost an economy in recession, defying predictions of 20 out of 23 economists in a Bloomberg survey.

But it soon reversed most its losses to trade at R12.9587 per dollar at 19:00 on Thursday, around the same level as before the SARB’s announcement. By 08:30 on Friday, it was trading 0.17% stronger at R13.01 to the dollar.

The rand has been one of the main beneficiaries of an emerging-market rally this year, driven by the belief that the US Federal Reserve will only enact rate increases slowly.

READ: Surprise cut in SA interest rates, rand hit

The high returns on South African bonds mean it’s unlikely to weaken much, especially as the central bank will be cautious about further cuts with inflation near the top of its target range, according to Aberdeen Asset Management and Rabobank.

“It’s not obvious why the currency should weaken from here,” said Kevin Daly, a money manager in London at Aberdeen, which oversees $11bn of emerging-markets assets, including South African debt. “We’re still looking at very high real rates and it’s not like these guys will be on a rate-cutting spree like Brazil. They’re very limited in what they can do.”

Local bonds were boosted by the rate decrease, with the yield on the government’s benchmark notes due in December 2026 dropping 10 basis points to 8.54%, the lowest in more than three weeks. The benchmark equity index climbed 0.4%, led by gains among insurers and retailers.

“It is a much-needed move from the reserve bank,” said Michele Santangelo, a fund manager at Johannesburg-based Independent Securities. “It’s probably much needed in terms of giving us some stimulus and to make costs of financing and borrowing a little bit cheaper.”

READ: Reserve Bank cuts growth forecast to 0.5%

The rand was also bolstered when the dollar dropped after US investigators were said to be examining a broad range of transactions possibly linking President Donald Trump’s businesses to Russia.

“This suggests the Trump administration won’t be focused on fiscal measures and will instead be trying to limit damage from these investigations, which is a reason we don’t expect the dollar to strengthen,” Piotr Matys, an emerging markets strategist at Rabobank in London, said.

“I don’t expect today’s decision in South Africa to weigh on the rand long. The overall message was that the central bank will be extremely cautious. Sentiment toward risky assets is positive.”

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sarb  |  interest rate  |  markets  |  currencies  |  rand

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