The rand’s drop against the dollar after last week’s surprise Reserve Bank (SARB) decision to hold interest rates appears to be a temporary setback, not a reversal of its longer-term strengthening trend.
That’s according to Kristof Kruger, head of fixed income trading at Prescient Securities. Having spiked to R16.98/$ from around R16.40/$ before Thursday’s decision — when most economists expected a hike from 7% to 7.25% — the currency had since pulled back to about R16.78/$ by Tuesday.
“The rand is recovering from last week’s sell-off, but until it breaks convincingly below R16.50/$, the bigger strengthening trend isn’t confirmed,” Kruger tells the FM. “It’s only a partial repair, not a full one.”
The rand’s weakness was compounded by renewed Iran-US tensions, which widened conflict in the Middle East and drove Brent crude above $100 a barrel for the first time since May, triggering a global bond sell-off, the Bureau for Economic Research’s Lisette IJssel de Schepper notes. Investec chief economist Annabel Bishop expects the weakness “not to last long” and sees no more hikes this year as her base case, though “much depends on energy prices”.
Kruger’s outlook hinges on three factors. First, whether Strait of Hormuz talks ease tensions and Brent falls to $75-$80 a barrel, which would improve South Africa’s inflation outlook and vindicate the SARB’s hold, potentially taking the rate to R16/$-R16.20/$ by October. Second is to restore SARB credibility. A benign July inflation print followed by a “confident” hold in September would improve risk perceptions. Third, should the Federal Reserve hold rates and foresee no effect on growth, emerging-market currencies will benefit, while signs of potential hikes would boost the dollar.
His three-month base case is a range of R16.20/$-R16.50/$, while the downside risk, at R17/$-R17.50/$, requires both rising oil prices and a forced SARB hike in September.
“The SARB credibility issue is real but not fatal,” Kruger says. “One surprise hold does not break a central bank. What breaks it is a pattern. September is the verdict.”