Rand’s volatility requires new year’s resolution

After a roller-coaster year for the rand, volatility in local markets shows no sign of abating.  

Analysts, however, are somewhat optimistic that this alone will not prompt further interest-rate increases for now, given signs that the risk of high inflation is easing.  

Those applauding the Reserve Bank’s decision to raise interest rates in November — a period of relative calm — were correct in thinking the wild swings in the value of the rand would continue. 

The rand’s implied volatility — based on the willingness of traders to buy and sell the currency — remains elevated by domestic and international risk factors, including domestic policy uncertainty and tepid economic growth. According to Bloomberg’s Implied One Month Rand Volatility Index, implied volatility was at 16.54% on Wednesday, well off its 2018 high of 22.81% in September. But the rand remains as volatile as it was ahead of the ANC elective conference in December 2017.

Various international factors have emerged to drive volatility in the rand in 2018,  including the US-China trade war and uncertainty over global monetary policy stimulus, but analysts maintain finding domestic policy clarity remains the key to keeping both the rand and inflation stable.

The Reserve Bank was unlikely to quell volatility through interest-rate increases, rather looking at longer-term trends, said Old Mutual Investment Group chief economist Johann Els.

Rand stability would improve if policy clarity and implementation improved, after the 2019 elections, set to take place in May, Els said.

There was likely to be limited room for raising interest rates, as the current environment remains somewhat deflationary, he said. 

The rand has vied with the Turkish lira in 2018  for the status of the most volatile emerging-market currency, but is fourth in terms of losses against the dollar. The domestic currency is often more volatile than its peers, as it serves as proxy for emerging markets in general, as it is easily tradeable.

The rand has depreciated 13.14% to the dollar in 2018, receiving some support, however, after the Bank raised the repo rate for the first time in two years in November. The lira has depreciated about 29%, and the Argentine peso 51.39%.

In November, the monetary policy committee highlighted long-term risks and the rand’s volatility, further emphasising they would like inflation to be closer to the midpoint of the Bank’s 3% to 6% target, in order to provide room to manoeuvre. 

The Bank’s interest-rate increase had helped to provide some stability to the rand, according to Nedbank CIB strategist Mehul Daya. 

Volatility in the rand can be expected to persist in early 2019, he said.

The first few months of the year should be particularly important, and major local risk events, including a possible Moody’s review, the unveiling of the budget in February, as well as the national elections are likely to be market moving, said Daya.

Even if the Fed becomes less hawkish, the continued winding down of its balance sheet  remains a concern for markets amid the lack of dollar liquidity and tighter financial conditions, he said.

“On a volatility-adjusted basis it is still relatively risky to invest in emerging markets. There are not many countries offering both higher interest rates and low volatility, among emerging markets SA is in the middle of the pack on this,” said Daya.

Sasfin Wealth’s head of fixed income trading, Ashley Dickinson,  says the finances of SA’s state-owned enterprises is also a factor in the rand’s volatility. 

“On the face of it, we are not in a great space … and it would appear that the ruling party [ANC] is avoiding hard, unpopular decisions on these institutions ahead of the election process,” he said. 

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Source: businesslive.co.za