SA ducks Turkey’s currency fallout

The US and Turkey are also engaged in a political battle over the detention of a US citizen, something that sent the lira to a record low on Thursday.

According to analysts, the support for the rand in July came largely as a result of a weaker dollar and receding tension over trade, with the lack of spillover a sign that investors considered Turkey’s problems as country-specific.

There were few signs Turkish risk was having a major effect on the rand, and when developments in that country did move the local currency, the effect was transitory, said NKC African Economics economist Gerrit van Rooyen.

Although there was scope for further gains, the primary catalysts would remain trade concerns and global monetary policy tightening, though SA’s domestic issues could also affect sentiment, said FXTM research analyst Lukman Otunuga.

This could mean pressure on the rand in coming months.

Both currencies have subsequently come under pressure in the early part of August, with political problems in Turkey continuing, while domestic concerns about land expropriation send the rand lower.

Much of the lira’s weakness in July had followed a surprise decision by the Turkish central bank to keep interest rates on hold, a move that comes even as inflation in that country pushes towards 17%. Markets had forecast an interest rate increase of one percentage point.

SA’s R186 10-year government bond strengthened by 24 basis points during the month, as investors took a more rosy view towards risk assets, due to easing global trade tensions.

Meanwhile, the yield on the Turkish government’s 10-year bond weakened more than 160 basis points.

Problems in Turkey are expected to mount, with that country’s central bank sharply raising its inflation forecast for 2018 to 13.4% on Tuesday, from 8.4% previously.

At its July meeting, the Bank lowered its average forecast for SA’s inflation for 2018 to 4.8%, from 4.9% previously.

The surprise move from the Turkish central bank was presumably due to political pressure from Erdogan’s government, said Old Mutual Multi-Managers chief investment strategist Dave Mohr.

SA, meanwhile, had “neither an inflation problem, nor an overly dovish central bank”, he said.

According to Capital Economics, the lack of spillover of currency problems in countries such as Argentina and Turkey was a sign that financial vulnerabilities in emerging markets were confined to a handful of economies.

There were concerns about public finances in countries such as SA and Brazil, but these were “slow-burning” problems, said Capital Economics senior emerging markets economist Neil Shearing.

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