Weak rand may lead to rate hike

Any expectations of a respite for the rand after last week’s beating were given a final nail in the coffin when President Jacob Zuma stated that the turmoil regarding Nenegate was not all that serious, and that markets did not understand what he was trying to do.

This is according to Wichard Cilliers, director and chief dealer at treasury services company TreasuryOne.

“This week has got a lot of potential banana peels that the rand could slip on. Several speeches by US Fed members could impact the markets, should any news of future rate hikes become evident,” he said.

Chinese trade balance data due on Wednesday and Chinese gross domestic product (GDP) numbers released on Thursday could also be a market shaker, in his view.

“This could be a harsh one for the rand, as the market seems to have turned its collective back on the currency and the only question is, how far will the rand fall?” explained Cilliers.

“So much for thinking that last week was the worst possible start for the rand and that things will only get better.”

After a week of Chinese economic uncertainty, North Korea’s nuclear testing and higher than expected non-farm payroll numbers, it looked like there could be some respite for the rand.

“This could have been the case, up until the South African president stated that the turmoil regarding the finance minister roller-coaster was not too serious and markets did not understand what he was trying to do,” said Cilliers.

“This was the final nail in the coffin for the rand, as the rand blew out to a record high of R17.95 against the US dollar before settling down at R16.70 before South African markets opened.”

He said the Chinese narrative of an economy under pressure and the continued risk off notion regarding South Africa will keep the rand on the back foot, with not a lot going for the currency or the country.

That is why he thinks it is a given that the Reserve Bank’s monetary policy committee (MPC) will raise interest rates at the end of the month.

“The question is, by how much? A 25-point hike seems almost arbitrary, but too much of a hike will definitely put South Africa in a recession,” said Cilliers.

Analysts at Standard Bank said on Monday that the rand’s “uncontrolled depreciation” may cause the MPC to raise rates by 50 basis points later this month.

By early afternoon the rand was trading at R16.49 to the dollar.

Fin24

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Weak rand may lead to rate hike