Cutting rates could cost the rand its best streak in 8 years

The rand’s longest streak of monthly gains in more than eight years is at risk of an abrupt halt, with South Africa’s central-bank Governor Lesetja Kganyago not only cutting rates but also talking down the currency.

The rand was on course for a fifth monthly advance, looking to extend what was already the longest run since June 2009.

Then Kganyago said recent gains had left it “somewhat” overvalued, and followed up by reducing the policy rate to a two-year low, even as he acknowledged the risk of eroding the currency’s yield advantage over the dollar.

The rand gained 0.1% to 11.76 per dollar by 8:26 a.m. in Johannesburg on Thursday following a 0.9% drop the previous day on the back of the central bank’s remarks. That left it up 0.3%in the month.

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

“A key external risk to the rand remains the possibility of a tighter-than-expected stance of monetary policy in the US in particular.”

The rand has been on a roll since mid-November, when Cyril Ramaphosa’s bid to replace Jacob Zuma as president started gaining momentum.

It has climbed 23% against the dollar as the new leadership moved to clean up governance at state-owned companies, curb government debt and shore up the country’s creditworthiness.

“It was a reality check from the governor,” Piotr Matys, an analyst at Rabobank in London, said by phone.

“Perhaps he wanted to send a signal that the rand’s valuation is a bit too stretched. I see it as a warning.”

For the rand to resume its rally, investors would have to see progress on economic reforms promised by Ramaphosa’s government, Matys said.

“Such is the optimism among investors that if there’s any delay, they will end up disappointed and the correction could continue,” he said.

“The external backdrop is also negative. US yields have fallen this week, which indicates growing demand for haven assets, probably because of concerns about trade wars. So, we’re seeing some profit-taking on long rand positions.”

Read: Rand weakens as Reserve Bank says currency is overvalued

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Cutting rates could cost the rand its best streak in 8 years