By Colleen Goko and Prinesha Naidoo for Bloomberg
A change in the way South Africa’s central bank implements monetary policy may lead to greater volatility in the rand.
The transition will start Wednesday night and will see the central bank shifting to a surplus system from its current deficit set-up, meaning commercial banks will be allowed to hold and earn interest on excess reserves. The South African Reserve Bank will also introduce measures to prevent banks from hoarding liquidity, and thus help maintain an interbank money market, similar to the “tiered floor” framework used by the Reserve Bank of New Zealand and the Norges Bank.
While the change won’t affect the central bank’s inflation target or interest-rate decisions, it may make it easier to speculate in the rand, resulting in wider price swings during times of stress. Elevated ZAR-USD basis-swap rates since the pandemic have made it expensive to short the South African currency.
“The currency basis will contract, making it cheaper to short the rand,” said Michelle Wohlberg, a Johannesburg-based fixed-income analyst at Rand Merchant Bank. “This could result in volatility in risk-off bouts.”
The rand has been less volatile this year than a host of peers – including the lira, zloty and real – even as risk assets came under pressure amid rising global inflation and policy tightening, concerns of a slowdown in China, and Russia’s war with Ukraine. The currency’s historic volatility versus the dollar has risen 63 basis points to 14.66%, the seventh highest of the 23 developing-currencies monitored by Bloomberg.
In a published paper addressing concerns around volatility, the Reserve Bank said managing the risk would require “caution and vigilance,” both during the transition to the new framework and in moments of acute market pressure. South Africa is the first emerging-market economy to adopt the tiered-floor framework.
“The risk is assessed as modest and does not represent a major objection to the concept of the new monetary policy implementation framework,” it said. “That said, the exchange rate may prove to be one area where South Africa’s status as an emerging market yields a different experience to those of advanced economies which have used floor-style systems.”
The central bank has “a long track record of tolerating FX volatility” and inflation expectations are anchored, and therefore not highly sensitive to exchange rate fluctuations, the paper said.
By Robert Brand for News24
The rand weakened the most in five months and benchmark bonds sold off as rolling power cuts, flood damage and signs of a Covid-19 comeback added to worries about the country’s economic outlook.
As global concern over rising US interest rates sent emerging-market currencies into reverse, the rand weakened more than 2% against the dollar on Tuesday, the biggest daily decline among the asset class.
Eskom warned the country may have more than 100 days of electricity blackouts this year because of outages. The government will ask parliament for additional funding of R1 billion rand to repair infrastructure damaged by deadly floods in KwaZulu Natal.
This hampers plans to reduce the budget deficit and curb government debt, a key factor preventing credit-rating upgrades. In addition, growing evidence of a resurgence of Covid “could complicate” South Africa’s economic recovery, said Brendan McKenna, an currency strategist at Wells Fargo Securities in New York.
The rand slumped 2.2% to R14.9717/$ late on Tuesday, the most since November 2021. The yields on 2032 government bonds climbed 18 basis points to 10.31%.
“There were some pretty severe floods in South Africa recently that caused a fair amount of damage,” McKenna said. “Looks like the government is asking for funds to start rebuilding, which could add to the debt burden and fiscal deficit.”
He said that public finances in the country were “already in bad shape, so that could be weighing on the currency too.”
Treasury yields surged Tuesday as inflation fueled by the war in Ukraine and supply-chain chaos bolstered expectations for tightening by the Federal Reserve, strengthening the dollar.
By Siphelele Dludla for IOL
The rand yesterday rose to a one-year high amid a subdued dollar in spite of rating agencies maintaining their junk status and negative outlook on South Africa’s sovereign debt.
The domestic currency strengthened 0.03 percent to R13.91 against the greenback by 5pm, its highest level since early January last year, on a positive growth forecast.
The South African Reserve Bank (SARB) last week upwardly revised its 2021 growth forecasts to 4.2 percent, from an earlier projection of 3.8 percent.
The rand appears to want to stay below the R14 mark around which it traded last week, despite an increase in global risk aversion.
Investec chief economist Annabel Bishop said the rand continued to benefit from the dollar’s weakness, as investors fear increasing interest rates in the US.
She said the rand was 5.6 percent stronger since the start of this year, leading several other emerging-markets currencies.
Bishop said South Africa would likely record a marked current account surplus in the first quarter of this year because of the boom in the commodity markets, which would boost the rand.
“Absent the global commodity price boom, the rand would not be seeing the degree of strength it has experienced this year against the US dollar,” Bishop said.
“And indeed, the second quarter looks set to record a current account surplus as well.”
On Friday, S&P Global Ratings and Fitch affirmed South Africa’s sovereign rating to sub-investment grade with a negative outlook because of rising government debt and low economic growth.
However, Fitch revised upwards South Africa’s economic growth, saying it would rebound to 4.3 percent this year supported by the base effect and the rise in commodity price, in line with the SARB forecast.
The SARB last week cited an upturn in near-term economic performance and improved public finances.
The bank also unanimously kept its benchmark repo rate unchanged at a record low of 3.5 percent as the Consumer Price Index rose 4.4 percent in April from a year ago on base effects.
Old Mutual Investment strategist Izaak Odendaal said although food inflation was at its highest level since mid-2017, the outlook was better.
By Dhivana Rajgopaul for IOL
The rand was little changed on Monday although the day’s trading saw the local currency briefly drop below the R14/$ threshold.
The decision by Moody’s Investors Service to let a scheduled rating announcement come and go without taking any action would have provided some support as the spectre of another downgrade would have been on investor minds during the lead-up to Friday.
Favourable sentiment would have been compounded by political developments over the weekend, with further signs that the balance of power in both the National Executive Committee and National Working Committee has swung in favour of President Cyril Ramaphosa.
There is again little hard data expected this week, although Thursday will see the release of the March mining production figures.
At close of local trade, the rand quoted 0.14 percent stronger, at R14.04/$, after trading in range of R13.97/$ to R14.12/$. The rand softened slightly overnight. The expected range of the rand against the dollar today is R13.90/$ to R14.20/$.
South African bourse
The JSE All Share (0.21 percent) ended in the red yesterday after technology shares plunged by 3.15 percent during the local trading session. Investors drew direction from US markets with well-known tech behemoths having also sold off sharply. In the overall emerging market sphere, the MSCI Emerging Market Index (-0.16 percent) traded lower.
Brent crude oil
The Brent oil price fell suddenly towards the later part of yesterday’s European trading session as rising Covid-19 case counts in Asia raised fuel demand concerns. At the close of local trade, benchmark Brent crude futures quoted 1.06 percent lower, at $67.98pb. Crude prices struggled to gain during Asian trade this morning.
The rand has staged a remarkable recovery, gaining almost 200c against the dollar. It has bounced back from R19/$ in April to R16,61 as of Tuesday.
Here are five drivers pushing the rand from Covid-19 doldrums:
- Quantitative easing – this occurs where central banks introduce new money into the money supply chain to support an economy. There has been a large volume of QE pumped into the system, which has seen financial markets increasingly look to invest into higher yielding assets, and with emerging market portfolio assets gaining from this investment flow, so emerging market currencies continue to strengthen substantially, she said.
- US dollar weakness – the greenback is on the back foot currently and emerging market currencies like the rand are benefiting from the weakness.
- Attractive yields – the rand is still attractive to yield-seekers. Many developed markets in the world have interest rates at zero or close to zero, investors worldwide are seeking yield. Despite our recent interest rate cuts, South Africa still offers some yield, which has helped the ZAR as the risk sentiment returned.
- Positive moves on all the major equity indices – markets priced in a post-Covid-19 recovery have spurred on emerging market currencies, including the rand. As a commodity currency, the rand also benefited from strong metals prices. Commodity currencies are up by around 4% month-on-month, which show greater gains over June to date than in May.
- Improving global financial market sentiment – the market is positive on prospects for global economic recovery.
The Competition Commission in South Africa said it has noted an agreement between Standard Chartered Bank and the New York State Department of Financial Services where Standard Chartered pleaded guilty to currency manipulation.
The Competition Commission said in a statement: “The Competition Commission has noted a consent agreement, which subsequently became a court order, between Standard Chartered Bank and New York State Department of Financial Services. In the consent order, Standard Chartered pleaded guilty to currency manipulation which included the South Africa Rand (ZAR) between 2007 and 2013. This is captured on pages 9 and 10 of the court order.”
The Commission said it would consider the impact of the order on the ongoing forex litigation with the banks in South Africa.
The statement continued: “In February 2017 the Commission referred to the Tribunal for prosecution a collusion case against Bank of America Merrill Lynch International Limited, BNP Paribas, JP Morgan Chase & Co, JP Morgan Chase Bank N.A, Investec Ltd, Standard New York Securities Inc., HSBC Bank Plc, Standard Chartered Bank, Credit Suisse Group, Standard Bank of South Africa Ltd, Commerzbank AG, Australia and New Zealand Banking Group Limited, Nomura International Plc., Macquarie Bank Limited, ABSA Bank Limited (ABSA), Barclays Capital Inc, Barclays Bank plc (Respondents).
“The Commission investigated a case of price-fixing and market allocation in the trading of foreign currency pairs involving the South African Rand since April 2015. The Commission found that from at least 2007, the respondents had a general agreement to collude on prices for bids, offers and bid-offer spreads for the spot trades in relation to currency trading involving US Dollar / Rand currency pair.
“Further, the Commission found that the respondents manipulated the price of bids and offers through agreements to refrain from trading and creating fictitious bids and offers at particular times. Citibank N.A. pleaded guilty and reached a settlement agreement with the Commission and agreed to pay an administrative penalty of R69 500 860. Citibank N.A. undertook to cooperate with the Commission and avail witnesses to assist the prosecution of the other banks.”
The commission said that since February 2017, it has been engaged in protracted litigation with the rest of the banks, including Standard Chartered Bank, on pre-trial issues such as jurisdiction of the South African authorities and disclosure of the Commission’s evidence.
By Lameez Omarjee for Fin24
The rand came under “massive pressure” on Tuesday morning, having weakened from R13.63 to R13.90, following news that US President Donald Trump is threatening new tariffs on Chinese imports.
TreasuryONE’s lead dealer Wichard Cilliers said in a snap note that all eyes would now be on the trade spat.
By 09:14 the local currency was trading 1.92% weaker at R13.90 against the US dollar after breaching this level for the first time since November 27 last year when the rand traded at R14.00/$.
“The trade wars are heating up with US president Trump to identify $200bn in Chinese imports for additional tariffs of 10% and on another $200bn after that if Beijing retaliates,” said Cilliers.
Trump reportedly said that the United States will no longer be taken advantage of on trade by China and other countries in the world. “We will continue using all available tools to create a better and fairer trading system for all Americans,” Trump said.
The IMF noted that this could place global growth at risk.
Bloomberg reports the tariffs could be the latest round of punitive measures in an escalating dispute over the large trade imbalance between the two countries. Trump recently ordered tariffs on $50bn (R692.77bn) in Chinese goods in retaliation for intellectual properly theft. The tariffs were quickly matched by China on US exports.
Apart from the trade wars, locally load shedding is also adding to currency weakness, commented NKC Africa Economics.
NKC expects the rand to trade within a range of R13.65/$ to R13.95/$.
RMB economist Mpho Tsebe noted that the rand was among Monday’s worst-performing emerging market currencies, along with the Colombian peso and the Thai baht.
“Given the fragile growth outlook and inflation contained within the 3%-6% target band, the SARB (South African Reserve Bank) is unlikely to increase interest rates to support the currency,” she said.
Peregrine Treasury Solutions’ Bianca Botes said investors are dumping emerging markets for safe haven assets, including US treasury bonds. “South Africa, due to the liquidity that our local market offers, often leads the losing streak, she said.
“Should these tensions elevate and strong data from the US keeps making its way to market, emerging market currencies will remain under pressure and one could very well see the rand target R14/$,” Botes warned.
However, Andre Botha, senior currency dealer at TreasuryONE was optimistic that the rand could recover.
“We still believe that the rand is overdone at these levels and should the tide turn and risk-taking behaviour start taking precedent again the rand could stage a comeback.” He echoed views that the rand’s performance largely depends on global events rather than local factors.
The rand eased in early trade on Tuesday, relinquishing some of the gains it notched up in a previous session on news that the ruling political party, the ANC was deciding whether to cut short president Jacob Zuma’s tenure as head of state.
According to a report by Reuters, the currency is expected to trade in the range of R12.00 to R12.25 on Wednesday, after it eased off its highs against the dollar during European trade on Monday.
The currency is tracking a wave of positive sentiment following the appointment of deputy president Cyril Ramaphosa, as ANC leader in December, while the ruling party’s top leadership has also decided that Zuma must leave office, with speculation about the timing.
Ramaphosa is expected to adopt more business-friendly policies, even though he enjoys the support of the communist party and the biggest labor union federation. His election as ANC leader helped boost the rand 10% last month.
At 09h55 on Tuesday, the rand softened against the dollar, but firmed against the pound and the euro:
• Dollar/Rand: R12.09 0.33%
• Pound/Rand: R16.90 -0.13%
• Euro/Rand: R14.83 -1.43%
A report by The Guardian late on Monday reiterated that plans are in place to oust Zuma within the next two weeks, despite comments from secretary general Ace Magashule that NEC had not yet made a decision on the future of the current president.
Investec Bank economist Annabel Bishop said in a note at the start of the week that the rand could strengthen to as much as R11 to the dollar, should the president be forced to step down.
Further strengthening would also cause fuel price cuts and place downward pressure on inflation, with the possibility of the rand moving towards R10 to the dollar should Ramaphosa continue to make reforms and promote growth, she said.
Bloomberg market analyst Robert Brand also remained positive on the currency, stating that it was possible for Ramaphosa to continue the rally by continuing to clamp down on corrupt state-owned enterprises such as Eskom, and possibly even move away from some of the ANC’s more populist ideas (such as land reform) so as to encourage continued foreign investment.
The rand rallied on Tuesday, strengthening to below R13.50 to the US dollar as the race for the ANC president enters the final stages.
Deputy President Cyril Ramaphosa is now firmly in the lead after winning backing from most ANC branches to succeed President Jacob Zuma as ruling party leader.
READ: Ramaphosa has edge, but leadership victory not guaranteed
RMB currency strategist Ilke van Zyl said in a morning note that the positive turn in local politics could buoy the rand further.
The local unit has clawed back more than a rand since it breached R14.50/$ just over two weeks ago on plans by President Jacob Zuma to push through free higher education.
By 09:10 the rand was trading 0.4% firmer at R13.46/$ from an overnight close of R13.52/$. The unit was still trading in the high R13.70s on Monday.
“Local politics are the main reason for the significant rally in the rand this morning as the race for ANC president enters the final stages. Kwazulu-Natal endorsed Dlamini-Zuma with 433 (69%) votes vs. 193 (31%) votes for Ramaphosa. But this was more than neutralised by Limpopo that crowned Ramaphosa with 391 votes (79%) vs. Dlamini-Zuma’s 104 (21%).
“Ramaphosa is now firmly in the lead and has the backing of five provinces with a total of 1 862 votes. Dlamini-Zuma has four provinces behind her and a total of 1,309 votes. Simplistically, this is a 59/41 percent split in favour of Ramaphosa,” she said.
Van Zyl however said it is important to remember that not all of the branches were allowed to vote and an accreditation of delegates will take place on the first day (the 16th) of the conference.
“Either way, this gap is very unlikely to be closed.”
South Africa’s GDP growth numbers are also due for release on Tuesday, with economists expecting an easing to 1.7% in quarterly growth from 2.5% recorded in the second quarter.
Van Zyl reckons markets are already pricing in low growth and the release should have minimal impact on the currency.
The rand surprised the market with a strong push to below R13/$ on Tuesday afternoon as the unit capitalised on a weaker dollar.
Earlier on Tuesday the rand continued its previous session’s slide to reach R13.12 to the greenback as the local unit faced more upside pressure from the North Korean missile launch.
By 16:47 the rand was trading at R12.99/$, 0.32% firmer than its previous close. It strengthened to R12.93/$ earlier in the session.
RMB currency analyst John Cairns said in his daily note to clients that the latest missile launch was North Korea’s most provocative ballistic test yet, as the missile flew over the northern Japanese island of Hokkaido, generating warnings for citizens to take cover.
“Given that a war between Japan/Korea/US and North Korea would be devastating — and generate R2.00+ big figure rise in USD/ZAR — one can understand the market’s nervousness.
“However, the problem with the catastrophe trade is that there is only a very small chance of a massive market event and a near certain chance that nothing will happen. Betting on the catastrophe therefore is almost always going to generate a loss, which is to say that, as with all the previous missile launches, expect risk aversion to die away rapidly, and for risk assets to recoup their losses,” Cairns said.
Commenting on the latest move, TreasuryOne told Fin24 there is no particular reason for the rand’s sudden strength.
“It surprised the market. The rand is capitalising on a weaker dollar and the North Korea missile scare has fallen into the background.”
TreasuryOne dealer Andre Botha earlier said North Korea’s missile launch early on Tuesday will only serve up more geopolitical tension, and more risk-off behaviour can filter into the market which can stop the rand from breaking through the R13-level against the US dollar.