Rand support could mean 75 basis points in rate cuts over 12 months, analysts say
The benefit to the local currency from investors’ search for yield could give room for three cuts by January 2020, says Bank of America Merrill Lynch
Interest-rate cuts by the US Federal Reserve could offer room for the Reserve Bank to cut rates by 75 basis points by January 2020, and global investors’ search for yield could see the rand at R13.90/$ by the end of 2020, according to analysts at Bank of America (BofA) Merrill Lynch.
The rand should continue to benefit from risk-on sentiment towards emerging markets, as markets price in a total of 50 basis points in interest-rate cuts by the US Federal Reserve over the next two meetings, BofA analysts wrote in a note on Monday.
Locally, focus this week is squarely on the Bank’s monetary policy announcement on Thursday, with the consensus among 19 analysts polled by Bloomberg that SA will get a 25-basis-point cut, bringing the repo rate to 6.5%.
The recent rand rally should offer some relief to the Bank, BofA said, and should the Fed’s easing cycle continue in September, SA could see 25-basis-point cuts in September and January 2020.
“In our baseline, the Eskom cash injection and widening fiscal deficit will weigh on the rand after the announcement of the medium-term budget policy statement (MTBPS). This should be offset by a weakening dollar by year-end that will provide the opportunity for the SA Reserve Bank to ease by another 25 basis points in January,” the analysts said.
According to the analysts, the rand should be at R14.20/$ by the end of 2019 and R13.90/$ by end-2020.
At 2pm on Monday the rand had firmed 0.8% to R13.8658/$, 0.85% to R15.6206/€ and 1.07% at R17.3921/£. The euro was flat at $1.1265.
Emerging markets were given a little boost earlier after data showed China’s GDP grew 6.2% year on year in the second quarter, with industrial- and retail-sales numbers beating expectations.
The support came despite China’s growth rate being at an almost 30-year low as it is a far bigger economy now than it was previously, said Monex Europe market analyst Simon Harvey.
Dovish commentary from Fed chair Jerome Powell last week also continued to boost sentiment, Harvey said.
Some focus is also on the state-capture inquiry, where former president Jacob Zuma has hit out at critics, saying he is a victim of “character assassination” as he faces down allegations of corruption and maladministration.
While the market was watching for headlines from the inquiry, it was not being closely watched, Harvey said, adding, that the accountability on display was positive for sentiment towards SA. “This is something that President Cyril Ramaphosa has driven home, so it is more about the political capital of the ANC rather than a market impact.”