Rand faces key test as focus turns to the budget
The rand was stable on Wednesday morning ahead of the budget, which could temper positive momentum generated by the recent local political transition, which ushered in Cyril Ramaphosa as head of state.
Peregrine Treasury Solutions analyst Bianca Bote said in a note that the local currency could weaken to R12/$ if the budget was perceived as weak and without much substance to stimulate economic growth and investment.
Finance Minister Malusi Gigaba is likely to announce increases in personal income tax and value-added tax (VAT) to fill the budget hole, which is estimated at R50.8bn.
Markets will also been keen to know how the government will finance the roll-out of the fee-free higher education for poor households.
The budget is likely to inform Moody’s ratings review, which is set to follow shortly after the budget.
Any further downgrade by Moody’s will lead to universal junk status‚ as the country will be excluded from the Citi world government bond index‚ leading to the drop in the value of the rand.
But the extent of the sell-off in the event that the country were to be downgraded remains unclear, given the momentum generated by Ramaphosa’s victory.
The dollar, meanwhile, continued to recover in line with rising US bond yields. This has put pressure on emerging-market currencies.
The sustained recovery in the dollar could hurt the rand, potentially closing the window for the Reserve Bank to resume its interest rate cutting cycle, which is expected as early as next month.
At 9.32am, the rand was at R11.7575 to the dollar from R11.7301, at R14.4763 to the euro from R14.4706, and at R16.4315 to the pound from R16.4173.
The euro was at $1.2312, from $1.2336.