Rand weakens as Reserve Bank says currency is overvalued

The rand weakened against the dollar in morning trade on Thursday, having lost ground against the greenback on Wednesday following a cut in the interest rates by the South African Reserve Bank, who said that it believed the local currency was overvalued.

SARB dropped the repo rate by 25 basis points from 6.75% to 6.5%.

“The rand has sustained its recent gains since late last year, and some of the key risks to the outlook have dissipated. Since the previous meeting of the MPC, the rand has appreciated by 4.8% against the US dollar, by 3.2% against the euro, and by 3.5% on a trade-weighted basis.

“At current levels, the SARB’s model assesses the rand to be somewhat overvalued, and further strengthening potential is probably limited,” the bank said.

Market analyst at IG, Shaun Murison, said that the decision to cut rates comes as the the consumer price index (CPI) measure of inflation has fallen to 4% – well within the SARB’s targeted range of 3% to 6%.

“While the SARB’s mandate is to target inflation, the decision to cut would have also considered economic growth within the country, with lower rates being more supportive,” he said.

“Recent news that Moody’s has decided to keep South Africa’s local currency credit rating at investment grade would have also removed a near-term headwind for the Reserve Bank in terms of inflation (spurred from currency depreciation and an increased cost of borrow).”

The rate cut was the result of a balancing act, said Bianca Botes, corporate treasury manager at Peregrine Treasury Solutions. “The Governor highlighted that while inflation has remained within the target 3%-6% range, it is likely to be at a cyclical low and an uptick can be expected as the year progresses.

“At the same time, pressure on inflation caused by the 1% hike in VAT on 1 April 2018 is currently being offset by a stronger rand, which itself remains resilient as investor confidence returns following the recent Moody’s rating decision.

Also announced on Wednesday, the US GDP figures came back slightly higher than expected, but a minimal impact was witnessed on the rand following the release.

“One can expect continuous downward pressure on the rand following the rate cut, coupled with the robust data released from the US. We can also expect to see a drop-off in carry trade as South Africa moves to lower rates while both the US and Europe enter a rate-hiking cycle,” said Botes.

From a technical or charting perspective, the long-term trend for USD/ZAR remains down (due to dollar weakness and rand strength). “However, in the short to medium term, we see the currency pair trading in a broad sideways range between R11.50/$ and R12.20/$,” Murison said.

“The USD/ZAR does look to be reversing around the support of this range, from what is considered oversold territory.

“Should the reversal hold, range traders might consider a move towards initial resistance at R12.05/$.

“Should the currency pair instead see the price move to close below the support of this range at R11.50/$, the range trade scenario would be deemed to have failed and the longer-term downtrend might be considered to be resuming,” he said.

At 09h11 on Thursday morning (29 March), the rand traded at the following levels against the major currencies:

  • Dollar/Rand: R11.81  (0.46%)
  • Pound/Rand: R16.61  (0.51%)
  • Euro/Rand: R14.55  (0.50%)

Read: How much you save on a R1 million bond after the interest rate cut

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Rand weakens as Reserve Bank says currency is overvalued