Rand eyes R15/$ as domestic outlook deteriorates

Growing expectations that the world’s major central banks will turn on the taps to boost flagging economic growth failed to lift the rand on Thursday, with the local currency still under pressure from poor economic data and domestic uncertainty.

The local currency weakened as far as R14.9186/$ on Thursday, an eight-month low, even though most global equity markets were benefiting from signs the US Federal Reserve will soon cut interest rates.

At 2.02pm, the rand was flat at R14.8684/$, 0.42% weaker at R16.7501/€, and 0.37% softer at R18.9183/£. The euro was 0.4% firmer at $1.1266.

Conflicting signals from the ANC with regards to the Reserve Bank’s mandate has added an element of risk, with the rand also battered by dismal first-quarter GDP statistics, released on Tuesday.

The rand is still being viewed negatively by international investors, and this should persist in the short term, probably until further details on policy are outlined in the state of the nation address (Sona) on June 20, said Christopher Shiells, a London-based emerging-markets analyst at Informa Global Markets. “The current environment presents a balancing act for emerging-market investors between the severity of the global slowdown and dovish global central banks.”

Even if global central banks are accommodative, SA may miss out on investors’ search for yield, as other countries are offering a brighter reform story — Brazil for example, Shiells said. “Much has been said about the first-quarter GDP shocker, but for us it simply reinforces the view that the country has no real fiscal space to boost its economy and keep bailing out state institutions.”

He added that using the Reserve Bank is not a solution to the predicament.​

Global focus on Thursday was on the European Central Bank (ECB), which is expected to outline the details of its own stimulus measures at 3.30pm SA time.

Dovish signals from the US Fed have helped support global equities this week.

The market is now pricing in up to three rate cuts of 25 basis points each this year from the Fed, while only a week ago the market was pricing in just one, said Schroders’ chief economist Keith Wade in a note.

There are signs that the economy is cooling and inflation remains low so there is little to stop the Fed making a precautionary “insurance” cut, said Wade. This could take place in July, but is more likely to happen in September.

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