Rand has the Fed to thank for limiting damage inflicted by Eskom

July would have been a worse month for the rand if it weren’t for the Federal Reserve.

South Africa’s currency has weakened about 1% against the dollar this month, buffeted by Eskom’s financial crisis and the strain it’s putting on government coffers. But the prospect of a Fed rate cut on Wednesday has capped the rand’s losses as money continues to flow into high-yielding assets.

Read: Eskom has 18 months to get its house in order

“Recent news around South Africa has not been positive,” said Carl Vermassen, a Zurich-based senior portfolio manager at Vontobel. “But South Africa is what we would call a typical emerging-market liquidity market. This means that the performance of the market is at least partly driven by global risk appetite. As such, Fed policy is important.”

Lower US rates would increase the rand’s carry appeal as the hunt for yield trumps bad news from South Africa, at least for now. The currency’s implied carry — a measure of expected returns for dollar-funded rand investments — is at the highest since May 2018.

While Eskom’s troubles are daunting, South Africa still has time to avoid losing its last investment-grade credit rating, according to Lukman Otunuga, a London-based research analyst at FXTM. Moody’s Investors Service, which rates the country’s debt at Baa3, is reviewing its assessment in November.

“With roughly three months, there is still some light at the end of the tunnel for South Africa should economic conditions stabilise,” Otunuga said. While a downgrade from Moody’s could send the dollar-rand cross back to levels not seen since March 2016 — around 16 per dollar — the currency could strengthen to 12.50 per dollar if South Africa avoids the junk rating and the Fed continues to ease policy, he said.

The rand slipped 0.2% to 14.23 per dollar by 2:30 pm in Johannesburg.

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