The rand surrendered a percent against the US dollar in trade on Thursday (20 February), as numerous Fed testimonials confirmed that the central bank will not be looking to cut interest rates in 2020 even in light of weakened earnings brought on by the Covid-19 Virus, with the US economy remaining resilient.
The dollar index continued its rally, as the greenback remains one of the top performing currencies for the year, placing pressure on the rand as budget jitters start to build, said Bianca Botes, treasury partner at Peregrine Treasury Solutions.
It seems that tax hikes will be unavoidable in this year’s budget, the currency expert said.
Peregrine Treasury Solutions said it believes that finance minister Tito Mboweni will deploy some of the following tactics to feed the government deficit:
- Increase VAT to 16%;
- Increase wealth taxes;
- Create a new upper tax bracket;
- Increase CGT and/or dividend taxes.
Botes said that the rand is likely to continue testing the R15.12 mark for a break towards R15.20 against the greenback.
Credit Suisse said in a note this week that a rand rally could be on the cards post the budget speech on February 26 – because it believes that the market may be underpricing the prospect of “supportive news”.
Pound Sterling Live reported that the local unit has given up more than 5% against the dollar over the the past month, because of weaker sentiment towards emerging market currencies related to the coronavirus outbreak, while concerns remain over a probable credit rating downgrade by Moody’s in March.
The ratings agency joined other financial analysts this week in cutting South Africa’s growth outlook for 2020 to below 1%.
Citing an economic slow-down based in low demand, widespread power outages, and the subsequent impact on key industries like mining and manufacturing, the group now sees South Africa’s 2020 GDP growth levels at just 0.7%.
“The budget next week represents two-way risk,” said Shahab Jalinoos, head of FX strategy at Credit Suisse. “Although we acknowledge that the risk of under-delivery is high, we also think that current rand pricing (i.e. around 15.00) somewhat under-prices the probability of a market-friendly outcome.”
“We see two positive ‘tail’ risks that could lead to a sizeable drop in USD/ZAR from current levels, namely (a) a VAT hike; (b) a funding deal for Eskom which is structured in a way that reduces the future need for government funding for the company. We think that both of these are real possibilities,” Jalinoos said.
Credit Suisse said it expects the rand to gain against the dollar reaching around R14.40 – R14.50 “over a span of a few days,” following the budget.
The rand traded at the following levels against the major currencies on Friday morning:
- Dollar/Rand: R15.10 (-0.16%)
- Pound/Rand: R19.47 (-0.05%)
- Euro/Rand: R16.30 (-0.06%)