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Market Analysis

Fundamental Analysis: Some Positivity for the Rand

March 28, 2019
BY Michael Stark

The rand bounced slightly this afternoon from recent lows after the South African Reserve Bank’s statement. The SARB held its repurchase rate at 6.75% as predicted and did not indicate the level of concern over growth some had predicted.

USDZAR retreated slightly from highs this afternoon, but it’s still up overall today to 14.63. EURZAR was similar at 16.43 now. Meanwhile against the yen the rand made a small overall gain today to 7.56.

Central bank disappoints the bears

The statement of the SARB’s monetary policy committee (MPC) this afternoon was somewhat negative in places, but not nearly as much as some had expected. Governor Kganyago commented on increasing costs of food and fuel lifting inflation somewhat but not to a great extent.

Comments from the MPC on growth were some of the most significant at the meeting. The bank indicated a relative lack of concern here despite considerable jitters in other markets. The SARB also revised its growth expectations for South Africa down, but less than some analysts had expected. The figure expected for GDP growth in 2019 now stands at 1.3% against January’s 1.7%.

Much of the negative sentiment on the rand this week can be explained by comparison with other emerging markets. Clearly the main driver here is the lira. TRY has been exceptionally volatile in the runup to Turkey’s local elections on Sunday. Friday saw the lira lose more than 8% against most currencies, the biggest daily loss since the crisis last year.

Markets widely consider the rand to function as a ‘bellwether’ like the lira. However, so far there hasn’t been much reaction by ZAR to developments in Turkey. Figures also don’t suggest a crisis. PPI was up slightly this morning, as were retail sales and inflation yesterday.

Rates continue to provide strong support to the rand over the longer term. EURZAR’s 6.75% differential and USDZAR’s 4.25-4.5% remain some of the highest available among widely traded currencies which retain a degree of stability (i.e. not the lira).

EMs and data in view tomorrow

The current balance of probabilities suggests that the rand is unlikely to suffer similar dramatic losses to those of the lira recently. However, traders should be aware of events and factors affecting emerging currencies like the lira, ruble, and peso.

Some of the data from South Africa tomorrow could have an impact on trading as well. Annual change in money supply is expected to increase slightly. The main one though is trade balance: the consensus here is for a significant increase out of negative territory to about 2-3 billion rand in surplus.

Rand set to extend losses

Sentiment in emerging markets generally is a significant negative factor for the rand, making more weakening in the near future the most likely scenario. Conversely, ZAR is probably the best placed emergent to withstand a selloff, so any downward movement is likely to be relatively small.

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