Rand volatility picks up ahead of Moody’s decision
The local currency is facing a series of risk events this week, including a ratings report by Moody's on Friday and a Reserve Bank interest rate decision on Thursday
Currency traders braced for more volatility in the rand, which slumped on Friday by the most in five months, ahead of the Reserve Bank's latest interest rate decision and Moody's Investors Service's credit-rating review.
The rand will have the second-biggest swings after Brazil's real among major currencies this week, with it's one-week implied volatility against the dollar rising to the most since February. Over one- and three months, with the latter period covering the May elections, SA's currency will regain its status as the most volatile major currency, according to Bloomberg data.
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It dropped 2 percent to R14.50/$ on Friday, its decline since October, as markets digested economic reports that showed German manufacturing at its weakest in more than six years, adding to signs that the global economy is faltering. SA's currency is down about 1% in 2019 so far and has tumbled from being as strong as R13.24/$ in January.
The German data came just two days after the US Federal Reserve indicated it was unlikely to raise rates in 2019, amid growing signals in the bond market that the world's biggest economy is heading for a marked slowdown, and potentially a recession.
Already suffering from speculation that Eskom's power cuts will harm growth, the rand was also pulled down by jitters in emerging markets after the Turkish lira slumped about 6%, as investors were spooked by a report showing a sharp drop in the country's foreign exchange reserves, raising concern that the central bank was selling hard currency to prop up the lira before elections at the end of the month.
Load-shedding is weighing on the local currency, which should continue its recent trend of underperformance, said Herenya Capital Advisors co-founder Petri Redelinghuys.
“I don’t think it is going to be an easy ride.”
While the Reserve Bank doesn't target the rand, policy makers have consistently cited volatility in the currency and its emerging-market peers as one of the risk to the inflation outlook. A weaker rand pushes up inflation by boosting the cost of imported goods, reducing the scope for the central bank to cut interest rates.
Moody's, the only major company with an investment grade rating on SA's debt, is widely expected to change its outlook from "stable" to negative, with most economists expecting a downgrade later in 2019. A downgrade, which could come on Friday, would have the potential of sparking capital outflows as the country falls out of key bond indexes, prompting forced sales that could weaken the rand and force bond yields higher -- another reason for the Bank to be cautious on rates.
Investec chief economist Annabel Bishop said on Thursday that political noise ahead of the May 8 poll had “elevated substantially” and surveys indicating a slip in the ANC’s support may have been responsible for some of the rand’s weakness.
“The latest polls still rank the ANC as the majority leader with its increasingly centrist, growth-enhancing policies. However, the ANC has lost some ground between polls and this may also be underpinning some of the domestic currency’s weakness,” said Bishop.