Rand firms 1% amid risk-on global trade
Global risk assets are in favour amid hopes of global stimulus, while earlier local data showed inflation decelerated to 4% year on year from 4.5%
The rand firmed on Thursday afternoon, benefiting from renewed investor interest in risk assets amid hopes that global economies are gearing up fiscal stimulus packages so as to boost flagging economic growth.
The rand led gains among emerging-market economies while European and US equity markets registered strong gains as markets waited for the release of US Federal Reserve minutes later in the day.
At 5.52pm, the rand was 1% firmer at R15.219/$, 1.02% at R16.8835/€ and 1.25% to R18.4655/£. The euro was flat at $1.11.
Earlier, consumer price inflation for July eased to 4% year on year from 4.5% in the previous month and below market expectations of 4.3%, according to a Bloomberg poll. The data supports the view by some economists that the SA Reserve Bank will move to cut rates to stimulate economic activity, which is likely to have a positive effect on the rand.
Lower interest rates will decrease the relative attractiveness of SA bonds, thus having a negative effect on the rand. Lower interest rates, however, will make government borrowing costs less expensive and provide an economic boost for SA’s flagging economy.
The rand was likely benefiting from a general positive trend for emerging-market currencies on Wednesday, said Ranko Berich, head of market analysis at Monex Europe in London.
The Bank has, however, highlighted the risk of the further depreciation in the rand which may constrain its ability to lower rates. Its next monetary policy committee meeting is scheduled for September 17-19.
London-based emerging-markets analyst at Rabobank, Piotr Matys said the Bank faces a “significant dilemma” and may have to wait for global market sentiment to improve.
“It’s going to be difficult for the rand to regain bullish momentum considering the likelihood of a prolonged trade war … we are very sceptical that we are going to witness any breakthrough in trade talks in the coming months and do not expect sustainable improvement in market sentiment towards risky assets anytime soon.”