Rand hits 4-week best against dipping dollar ahead of interest rate decision

South Africa’s rand continued its good form against the dollar, gaining for third consecutive day on Tuesday (15 September), to a month-best.

Hopes for a vaccine for Covid-19 and a bounce in Wall Street has improved risk appetite and seen the dollar soften, noted TreasuryOne.

Reuters reported that AstraZeneca resumed British clinical trials of its Covid-19 vaccine, on Monday, while Pfizer Inc and BioNTech SE proposed over the weekend expanding their Phase 3 vaccine trial.

Investors are also awaiting the Federal Reserve’s policy meeting Wednesday to gauge the outlook for markets following a slide of about 2% in global stocks this month, Bloomberg said.

The Fed is expected to maintain its dovish stance after earlier saying it will shift to a more relaxed approach on inflation.

“Market volatility is returning after months of steady advances in risk assets,” BlackRock Investment Institute strategists led by Elga Bartsch said. “Valuations have risen, and we could see greater volatility as a result, especially as the US election closes in.”

The rand, meanwhile, gained 1.3% on Tuesday as risk-on sentiment takes hold following weeks of rangebound trading, said Bianca Botes, executive director at Peregrine Treasury Solutions.

She said that the interest rate decisions due from the Federal Reserve, BoE and SARB take the spotlight this week, with markets clearly preparing for further stimulus, at least from the Fed.

“The abundant liquidity resulting from accommodative policy is supportive of emerging markets, even though the underlying fundamentals of these risk-driven markets might be questionable.”

“We are currently trading at a four-week high,” Botes said.

In afternoon trade on Tuesday, the rand traded at the following levels against the major currencies:

  • Dollar/Rand: R16.43  (-1.40%)
  • Pound/Rand: R21.19  (-1.02%)
  • Euro/Rand: R19.52  (-1.30%)

The Reserve Bank policy meeting is due Thursday 17 September.

“Approximately 40% of economists are predicting a 25bps cut while 60% expect the repo rate to remain unchanged. South Africa has already had an aggressive 300bps worth of policy rate cuts in 2020.

“Despite the consensus forecast for no change in the repo rate, weaker than expected GDP and inflation, and the strengthening of the rand lend the possibility of a further rate cut at either the September or November policy meetings,” said Overberg Asset Management in a note.

BNP Paribas said in a research note that it maintains its call for the Reserve Bank to cut the policy rate by 25bp.

“The bank’s data dependent language, materialising downside GDP risks and recent ZAR support are likely to sway a still divided monetary policy committee, we think,” said Jeff Schultz, senior economist at BNP Paribas.

“The risks to a ‘no change’ stance are not negligible, however, with the committee likely cognisant of the need to try and keep rates as stable as possible next year amid still large fiscal risks.”

Though backward looking, the 51% q/q slip in Q2 GDP highlights that SARB will likely have to revise down the 7.3% contraction it currently has for 2020 GDP, the economist said.

“More telling, in our view, will be whether the central bank is beginning to lose faith with its estimate for a healthier bounce back in 2021 GDP, which it sees averaging 3.7% versus our own 2.5% estimate.”

He said that the bank see scope for downside revisions, given that some of the structural weaknesses, such as electricity supply cuts, that plagued the economy prior to the virus outbreak have returned.

BNP Paribas said that as the SARB nears the end of its cutting cycle, any future decision policy rate is unlikely to be unanimous and will be highly data dependent, considering the sizeable fiscal risks in the system.

Read: Push to reopen South Africa’s international borders by next month

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Rand hits 4-week best against dipping dollar ahead of interest rate decision