July would have been a worse month for the rand if it weren\u2019t for the US Federal Reserve.<\/p>\n
South Africa\u2019s currency has weakened about 1% against the dollar this month, buffeted by Eskom\u2019s financial crisis and the strain it\u2019s putting on government coffers.<\/p>\n
But the prospect of a Fed rate cut on Wednesday has capped the rand\u2019s losses as money continues to flow into high-yielding assets.<\/p>\n
“Recent news around South Africa has not been positive,\u201d said Carl Vermassen, a Zurich-based senior portfolio manager at Vontobel.<\/p>\n
\u201cBut South Africa is what we would call a typical emerging-market liquidity market. This means that the performance of the market is at least partly driven by global risk appetite. As such, Fed policy is important.\u201d<\/p>\n
Lower US rates would increase the rand\u2019s carry appeal as the hunt for yield trumps bad news from South Africa, at least for now. The currency\u2019s implied carry — a measure of expected returns for dollar-funded rand investments – is at the highest since May 2018.<\/p>\n
While Eskom\u2019s troubles are daunting, South Africa still has time to avoid losing its last investment-grade credit rating, according to Lukman Otunuga, a London-based research analyst at FXTM. Moody\u2019s Investors Service, which rates the country\u2019s debt at Baa3, is reviewing its assessment in November.<\/p>\n
“With roughly three months, there is still some light at the end of the tunnel for South Africa should economic conditions stabilise,\u201d Otunuga said.<\/p>\n
While a downgrade from Moody\u2019s could send the dollar-rand cross back to levels not seen since March 2016 – around R16 per dollar<\/strong> – the currency could strengthen to R12.50 per dollar<\/strong> if South Africa avoids the junk rating and the Fed continues to ease policy, he said.<\/p>\n The rand slipped 0.2% to R14.2350 per dollar by 14:30 pm in Johannesburg.<\/p>\n
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