Picture: REUTERS
Picture: REUTERS

The rand is again testing levels below R13 to the dollar, although analysts are sceptical the currency will be more successful than during previous attempts.

On Monday, the rand firmed to R12.8912 to the dollar in intraday trade, the best level in three weeks, as the dollar remained under pressure in risk-on trade after the US Federal Reserve’s dovish message last week.

Changes in international capital flows could cap any further gains in the rand.

Sanlam economic adviser Jac Laubscher singled out the inclusion of China’s A-shares into the benchmark Morgan Stanley Capital International (MSCI) emerging market index as an inhibiting factor.

The weighting of A-shares in the index could rise to 9%, he said, implying $230bn in net inflows into China. "As China’s weighting in the MSCI index increases, the respective weightings of its other constituents including SA, would automatically decline."

SA’s economy averaged an annual 1.5% growth over the past five years. At the same time, SA’s current account deficit averaged 4.8% of GDP over the period, making it an unattractive investment destination.

The weakness of the dollar had helped risky currencies in the short term as last week’s low inflation number (at 1.6%) caused some jitters within the Federal Reserve, said TreasuryOne trader Andre Botha.

Markets were also eyeing interest rate decisions by the Reserve Bank and European Central Bank on Thursday, with no changes expected.

Botha said cutting rates could improve growth but this brought a risk of capital leaving the bond market. Bond inflows had supported the rand.

"With a downgrade staring us in the face, a weaker currency would lead to much higher inflation, which would necessitate a rate hike again," he said.

The rand also found support from firmer commodity prices and generally positive sentiment towards resources stocks following backtracking by the government on the implementation of the Mining Charter.

The rand has traded in a range of R12.40 to R14.00 to the dollar in 2017. It made two serious attempts to break through the R12.40 level this year.

The first was on March 24, when the rand firmed to R12.43 to the dollar. That was short-lived after President Jacob Zuma fired Pravin Gordhan as finance minister the following week, resulting in the subsequent downgrade announcements.

The rand weakened to R13.94 to the dollar on April 11, before firming to R12.63 on June 14.

That move was equally unsustainable as the local currency weakened to R13.5601 to the dollar last week amid emerging market jitters on a hawkish Federal Reserve stance.

That changed later after chair Janet Yellen’s dovish address to the US Congress last Wednesday and Thursday, which again favoured risk-on trade in emerging markets.

Yellen’s comments were cautious about policy tightening and signalled that interest rate increases in the US would be gradual‚ with inflation closely watched. Yellen said interest rates need not rise much further, a view strengthened by subdued US consumer inflation data that makes it unlikely inflation will rise to the Federal Reserve’s targeted 2% anytime soon.

The dollar was on the back foot on Monday, weakening to $1.1487 to the euro from $1.1473.

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