Traders eye mini budget for direction

2012-10-22 14:18

Johannesburg - Finance Minister Pravin Gordhan will table his medium-term budget policy statement (MTBPS) on Thursday as local currency traders expect events from the statement to be extremely rand friendly.

It is expected that the MTBPS could provide plans on how to grow the country’s economy and to chisel away at the current account deficit of R12.2bn.

The rand is expected to be range bound in the days leading into the MTBPS‚ as international and local issues could keep the rand weaker.

“We are still expecting to be in the region of R8.55 against the US dollar before the meeting. We are waiting to see what Gordhan has to say with regards to the budget and the current account deficit‚” said Lynden Reabow‚ an FX sales trader from PSG Prime.

One of the ways in which the government is expected to deal with the deficit was by keeping the rand as weak as possible. As rand weakness is good for economic growth via an implied easing of effective monetary conditions.

“It places domestic producers in a better competitive position relative to competitors in export markets and relative to foreign suppliers into the domestic market‚” Bruce Donald‚ head of Standard Bank’s rand strategy‚ said in a note last week.

The rand is currently bid at R8.62 against the dollar‚ 0.40% stronger than its close of R8.66 on Friday.

Other traders believe other factors could also have an impact on the currency.

RMB said it did not expect the rand to strengthen significantly this week as global risk appetite continued to fall for emerging market currencies due to expectations not being met at the European Union (EU) Summit last week.

“Markets hoped to receive details on how the banking union will be implemented and some indication of a path towards a fiscal union. However‚ policy makers only provided an indication that an agreement on a banking union should be achieved by year-end and that the agreement should be implemented in 2013. A fiscal union will only be discussed at the next leaders’ summit‚” RMB said in a note.

Absa Capital said that eyes will also be directed towards the Federal Open Market Committee (FOMC) later this week.

“Participants will be watching the FOMC as well as US retail sales and GDP data this week‚ because all three could provide some insight into the likely longevity of the Fed’s prevailing quantitative easing measures‚” the bank said.