On Thursday the rand rose to R6,78/$ by 0541 GMT, after touching 6.7775 earlier, its firmest since January 2008. It was 0.61 percent stronger than its Wednesday close of 6.8240. Its appreciation against a trade-weighted basket of currencies this year amounts to nearly 7%.
Sustained rand strength is prompting a dramatic revision of inflation forecasts and bolstering the case for another cut in interest rates — already at 30-year lows.
Disappointing retail sales figures released yesterday, coupled with news this week of surprising weakness in manufacturing, have set the scene for a further cut.
Forward rate agreements in domestic money markets are pricing in a 65% chance that the Reserve Bank will trim its repo rate by another half a percentage point to 5,5% within six months.
Traders expect the rand to rally further if there is no letup in the heavy global capital inflows to emerging markets, which they see as likely. That has boosted the currencies of developing markets to unwelcome levels, eroding the competitiveness of their exports.
Finance Minister Pravin Gordham hinted at official concern over the rand. “Over time we want to achieve a more competitive real exchange rate,” he said in reply to a question in Parliament.
Behind the dramatic gains in the rand and other emerging currencies is foreign buying of local shares and bonds, as investors seek better yields than those on offer in developed economies.
At its last monetary policy meeting last month, the Bank forecast an average inflation rate of 4,8% for next year, rising to 5,1% in the final quarter of 2012.
However, the longer-term inflation outlook may not have changed enough to warrant a cut, in the Bank’s thinking. It is also reluctant to react too quickly, and will probably want to see it below R7/$ for a couple of months before lowering its inflation forecasts.
That makes a rate cut, if it happens at all, more likely at the Bank’s meetings in January or March, rather than next month.
The Bank has already cut its key repo rate by six percentage points since December 2008, to help boost the pace of recovery from last year’s recession.
When the Bank cut rates last month, Ms Marcus said there was limited scope for further easing — a view most analysts share. But what could swing consensus the other way, bringing it in line with market thinking, would be further evidence of weakness in the economy.
What could upset the apple cart is official measures to curb the capital inflows which are driving the rand to new heights — expected in the Treasury’s medium-term budget policy statement later this month.
In the first eight months, foreigners bought a net R70bn of government bonds. There have been some outflows since then, but news yesterday that the Federal Reserve plans to ease policy again whetted global risk appetite, driving shares up.
Source: Business Day
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