The rand made strong gains against the dollar in Monday morning trade, as investors cheered positive US-China trade progress, while South Africa held on to its last investment-grade credit rating.
On Friday, Moody’s Investors Service changed the outlook on South Africa’s credit ratings to negative from stable – but affirmed the Baa3 long-term foreign-currency and local-currency issuer ratings.
“The rand held steady over the weekend, considering the adjustment of South Africa’s credit rating outlook by Moody’s late on Friday evening,” said Bianca Botes, treasury partner at Peregrine Treasury Solutions.
“Most investors feel that the announcement had already been priced in, with short-term positivity seeing the rand moving stronger against the US dollar being probable during the course of the week. Sunday evening confirmed this frame of thinking, with the rand strengthening to R14.87/$.”
Looking ahead, Botes said that week will see Standard Bank PMI numbers being released on Tuesday, while manufacturing production PMI numbers are set for release on Thursday.
Further abroad, the EU will see PPI numbers being released, while US PMI and trade data will be announced on Tuesday.
Moody’s held the nation’s foreign- and local-currency readings at Baa3, one step above junk. The nation is already rated below investment grade at S&P Global Ratings and Fitch Ratings, both of which shifted its status to junk in 2017, Bloomberg said.
If Moody’s cuts South Africa’s rating, the country would lose its place in the FTSE World Government Bond Index. Exiting it would spark an investor sell-off and outflows of as much as $15 billion, according to Bank of New York Mellon Corp, at a time when the nation needs portfolio investment to finance its persistent current-account deficit.
A downgrade would also raise borrowing costs, complicating the government’s efforts to balance the budget, Bloomberg reported.
The change in outlook from Moody’s reflects “the material risk that the government will not succeed in arresting the deterioration of its finances through a revival in economic growth and fiscal consolidation measures,” the credit assessor said in a statement Friday.
“South Africa has been a car crash in slow motion,” Cristian Maggio, London-based head of emerging-market strategy at TD Securities, said ahead of the market open. “We’re still at a point where that car has not hit that wall, but you can definitely see that’s where they’re going.”
The rating affirmation affords South Africa a “narrow window to demonstrate faster and concrete implementation of reforms,” South Africa’s National Treasury said in a statement after the announcement from Moody’s. “Economic reforms have to be implemented without delay.”
US Commerce Secretary Wilbur Ross expressed optimism the US would reach a “phase one” trade deal with China this month and said licenses would be coming “very shortly” for American companies to sell components to Huawei Technologies Co.
Trump told reporters Sunday a trade deal, if completed, will be signed somewhere in the US, Bloomberg reported.
“Everyone is kind of upbeat around the prospect of at least a partial China-US trade deal,” Peter Dragicevich, a strategist at Suncorp Corporate Servcies, told Bloomberg TV. “It’s going to keep equities pretty supported.”
The rand traded at the following levels against the major currencies on Monday morning:
- Dollar/Rand: R14.84 (-1.30%)
- Pound/Rand: R19.19 ( -1.35%)
- Euro/Rand: R16.57 (-1.28%)