Rand likely to remain volatile
Ahead of Mboweni’s medium-term budget, currency set to keep status as fluctuating most in emerging markets
Fresh from its biggest quarterly drop against the dollar in more than a year, the rand may be set for a rough month leading up to finance minister Tito Mboweni’s medium-term budget policy statement.
The medium-term budget policy framework, which he is due to present to parliament on October 30, is seen by some economists as a vital indicator of the country eventually losing its last remaining investmentgrade rating, potentially resulting in flight from its bond market.
Frustration with the slow pace of economic reform locally and a global environment dominated by US-China trade tensions pushed the SA currency to a 7.25% fall in the third quarter, its biggest decline since the three months to end-June 2018.
“At the moment there is not too much to be overly confident about, unfortunately,” said Nedbank chief economist Dennis Dykes. “What has been at play most recently are global factors, but locally we desperately need to get economic growth reform.”
The rand’s weakness in the quarter came despite interest rate reductions in the US and eurozone, which would normally support the yield advantage of local assets and give the Reserve Bank room to cut rates.
A volatile rand will probably cause the Bank, which seeks to keep inflation between 3% and 6%, to refrain from giving muchneeded stimulus in the form of interest rate cuts to the economy, which it expects to grow by only 0.6% in 2019. A weaker rand boosts inflation with higher prices for imported goods.
The currency’s vulnerability to events further afield was highlighted on Monday when it lost as much as 0.6% to its weakest level since September 3, after the US threatened to limit US portfolio flows into China.
Some of the mooted steps included banishing Chinese companies from US stock exchanges or limiting the ability of US citizens to gain exposure to Chinese markets. The conflict is detrimental to emerging markets, which suffer from the expected slowdown in global trade and growth, which dents demand for their exports.
The rand was 0.3% lower at R15.22/$ by 5.55pm on Monday. Since its 2019 best level of R13.2362, it has lost almost 15%.
“It seems every time we take a step forward with the trade war and optimism rises ahead of a meeting between the two teams, we get some negative headlines,” said Craig Erlam, a senior market analyst at Oanda.
In line with the rand’s status among the most volatile currencies in the world, year-end estimates of analysts in a Bloomberg survey range from R13.60/$ to R17.70/$, while its implied volatility for the next three months is 15.2%, the highest among emerging currencies.
The rand’s decline came as the ANC’s highest decisionmaking body was locked in talks over the economy, with the growth strategy unveiled by Mboweni in August rejected by the SACP and Cosatu. Mboweni gave the national executive committee a gloomy outlook for the economy if the party does not adopt unpopular policies in the alliance, such as the sale of some state-owned enterprises.
“If you’re impressing investors and rolling out the red carpet instead of hitting them on the head all the time, then you might see economic growth come through quite strongly, but at the moment that does not seem likely,” said Dykes.