Rand set to remain volatile due to SA’s political dysfunction
THE RAND will continue to exhibit volatility this week as emerging markets currencies come under pressure amid signals from developed markets’ central banks that an era of easy monetary policy and low interest was reaching its conclusion.
The rand last week slumped to a seven-month low as the governing ANC said it was considering nationalising the Reserve Bank, but affirmed the bank’s independence.
On Friday at 5pm, the rand was trading at R13.40 against the dollar, R15.28 against the euro and R17.22 against the pound.
John Cairns, an analyst with Rand Merchant Bank, said he felt the rand had overreacted to news of the ANC to nationalise the Reserve Bank and that the rising global bond yields had weighed heavily on the local unit.
“Control of the SARB has always been in the government’s hands, so nothing will actually change, even in the unlikely situation that the ANC approves the policy proposal in December. The SARB will remain independent,” Cairns said.
He added that he expected the rand to trade in the range of R13.25 and R13.73 against the greenback this week.
Government bonds across the globe have seen a sharp up-tick in the past two weeks as markets price in the increasing possibility that central banks adopt a more fundamental-driven market, which will see an increase in interest rates that have been kept low since the 2008 global crisis.
Kamilla Kaplan said she expected the volatility of the rand to persist this week and to trade in a range of R12.90 to R13.90 against the dollar, R14.80 to R15.80 against the euro and R16.80 to R17.80 against the pound.
“The evolution of domestic political events could continue inducing volatility in the currency. However, the broader emerging market backdrop is likely to remain the key influencing factor for the rand.
“The collective message from the European Central Bank, US Federal Reserve, Bank of England and the Bank of Canada last week, was of monetary policy tightening.
But with inflation broadly benign, aggressive policy normalisation is not expected. This, coupled with the positive momentum in global growth and trade, continued to support emerging market portfolio flows,” Kaplan said.
Macroeconomic statistics website Trading Economics said historically, the rand reached an all time high of R16.84 against the dollar in January last year and a record low of R0.67 in June 1973.
The notes from the European Central Bank’s June policy meeting released last week showed it had discussed dropping a pledge to accelerate its bond-buying programme.
Minutes from the US Federal Bank, also released last week, revealed the bank has a desire to hike interest rates at least one more time this year and begin to reduce its $4.5 trillion (R60.22trln) asset portfolio it had built up to save the economy from the financial crisis.
Mamello Makinca, an economist at First National Bank, said the bank had lowered its growth forecast for the South African economy for the year to 0.4 percent from 0.7 percent it had initially forecasted.
“We believe that the mediumterm growth prospects will be constrained by ongoing delays in the necessary governance changes to lift the performance of state-owned enterprises; and the implementation of much needed growth-boosting structural reforms, mainly due to heightened political dysfunction,” Makinca said.
Meanwhile, the Banking Association of South Africa (Basa) on Friday said the nationalisation of the Reserve Bank was not a deal-breaker as long as its independence remained intact.
Cas Coovadia, the managing director of Basa, said it was in the interest of all South Africans that the independence of the SARB was protected.
A vendor counts out rand banknotes at an African craft market in Rosebank. Instability is largely to blame for the currency’s volatility.