Rand pushes to five-month high, but may not hold on to gains
The rand joined other emerging-market currencies in cheering a dovish US Federal Reserve policy outlook, but huge headwinds persist
The rand pushed to a five-month high against the dollar on Thursday, lifted by news that dovish US Federal Reserve policy is on the way, as well as reports that the Public Investment Corporation (PIC) had offered to convert R90bn of the debt owed to it by Eskom into equity.
Local bonds strengthened, with the yield on the benchmark 10-year bond dipping below 8% for the first time in 15 months, providing additional support for the rand and reinforcing expectations the Reserve Bank will cut interest rates later in July.
Analysts warned, however, that a deteriorating local and global economic picture means that volatility for local assets should increase as the year proceeds. The rand also has little room for further gains.
At 4.30pm the rand was 0.51% firmer at R13.9126/$, having earlier risen to R13.8573/$, its best level since February. The rand has now gained 8.3% since its 2019 low of R15.173/$ in June.
The local 10-year government bond due 2026 has also strengthened, with its yield falling below 8% in intraday trade on Thursday for the first time since April 2018. Bond yields move inversely to bond prices.
The reappointment of Reserve Bank governor Lesetja Kganyago for a second term on Wednesday evening also provided some lift to the currency, while the local currency extended earlier on a Bloomberg report that the PIC had proposed converting $6.4bn of the debt owed to it by Eskom into equity.
This would be in return for a say in what happens to the entity, including board representation.
Although good news for Eskom, it also “again highlights the plight faced by Eskom, given that the PIC is resorting to this,” said Mercato Financial Services analyst Nico du Plessis. Expectation of Fed interest rate cuts was by far the major factor driving the rand, he said.
In testimony before US congress on Wednesday, US Federal Reserve chair Jerome Powell had struck a downbeat note regarding the performance of the US economy, helping to reinforce expectations of a interest rate cut at the Fed’s July meeting. According to Bloomberg, the market is pricing in a 100% chance of a cut at the meeting, which includes a 26.5% chance of a 50 basis point cut.
Although this news had helped the emerging market currency rally, this boost was unlikely to last much longer, said Per Hammarlund, chief emerging markets strategist at SEB in Stockholm.
Ultimately, slowing US and Chinese growth would weigh on emerging markets, he said, adding that the two major factors facing the rand were global growth, and what sort of solution would serve to ultimately unite the ANC behind salvaging Eskom.
“With all these uncertainties in mind, the rand will be one of the most volatile emerging market currencies in the second half of the year,” Hammarlund said.
Progress in structurally reforming SA’s economy was likely to be slow, as solutions were difficult to sell politically, said Nedbank senior economist Nicky Weimar.
The rand was now quite close to fair value, and therefore was unlikely to register significant gains in coming months, she said at a Nedgroup Investments summit in Sandton.