Investec chief economist Annabel Bishop says their growth forecasts have been slashed and conditions now necessitate a rate cut. Picture: SUPPLIED
Investec chief economist Annabel Bishop says their growth forecasts have been slashed and conditions now necessitate a rate cut. Picture: SUPPLIED

The rand capped its third consecutive week of gains against the dollar on Friday, with analysts saying it may be set for further strength as concern about emerging markets unwinds.

Interest rate increases in the Philippines and Indonesia on Thursday provided the market with further reason to dip into risk assets, analysts maintain, while the fears about global monetary liquidity that had put emerging-market currencies under serious strain in August now appear overdone.

The rand has the prospect of strengthening towards R13.80 to the dollar in coming weeks, and while issues of dollar liquidity have abated somewhat, structural issues remain, said Nedbank Corporate and Investment Banking strategist Mehul Daya.

The rand has firmed to R14.15 to the dollar in the three weeks to Friday, from R15.23 — its best performance since February. It is, however, still down more than 12% to the greenback so far in 2018.

Tighter monetary conditions imposed by the Federal Reserve and weaker commodity prices, as the credit cycle in China slows, have been draining US dollars from the rest of the world, said Nedbank.

This has abated somewhat recently, however, offering support for oversold risk assets.

The combination of a bullish assessment of the US economy by the Federal Reserve last week and easing concerns about emerging markets has supported the currency, analysts said. President Cyril Ramaphosa’s comments that the rand is undervalued and his assurances on policy were also supportive factors.

Risks remain, however, with the Reserve Bank in September voting 4-3 to keep rates on hold, while also striking a more hawkish tone.

Resistance

"SA will risk substantial further rand weakness if the differential between SA and US interest rates widens on an unchanged interest rate stance in SA," said Investec chief economist Annabel Bishop.

"However, politically, proposed interest rate hikes in SA are now proving to see increasing resistance."

Global factors also pose risks to the rand, with the euro, which the local currency usually tracks, now facing headwinds as concerns over the Italian budget return. The Italian government’s decision to push for higher deficits — in order to meet electoral pledges — should prompt a prolonged period of volatility, said Barclays Research analyst Fabio Fois.

gernetzkyk@businesslive.co.za