south african news today

PRETORIA, SOUTH AFRICA – MARCH 26: Reserve Bank governor Lesetja Kganyago on March 26, 2015 in Pretoria, South Africa. The Reserve Bank Monetary Policy committee has decided to keep interest rates on hold at 5, 75 percent. (Photo by Gallo Images / Business Day / Puxley Makgatho)

Lower interest rates and decreased bond yields instrumental in Rand pull back

Last week saw the Rand weaken by as much as 2%, reaching a low of 11.89 to the Dollar on Thursday before closing at 11.83 before the Easter weekend. After the holidays, the Rand has been gravitating around a support level of 11.84 to the Dollar.

south african news today

PRETORIA, SOUTH AFRICA – MARCH 26: Reserve Bank governor Lesetja Kganyago on March 26, 2015 in Pretoria, South Africa. The Reserve Bank Monetary Policy committee has decided to keep interest rates on hold at 5, 75 percent. (Photo by Gallo Images / Business Day / Puxley Makgatho)

Last week the Governor of the South African Reserve Bank (SARB), Lesetja Kganyago, announced South Africa’s first rate-cut since July 2017, reducing the Repo rate to 6.5% from 6.75%. Following this, commercial banks announced that a decrease in the prime lending rate to 10% would take effect from Thursday 29 March.

Such action typically results in capital outflows as hot money tends to follow higher interest rates. Traditional economic theory was demonstrated as the Rand traded as much as 1% weaker directly after the rate-cut. This was not unexpected, as the notion that the Rand was overpriced played a big role in the rate-cut decision.

We have also seen a one-basis point drop in yields on bonds due 2016 (which itself reaffirms some of the recent Rand weakness) to 7.9%, the lowest on a closing basis since April 2015.  Even amidst these decreases, South Africa still holds the highest yield amongst investment-rated emerging market economies. In fact, capital inflows into South African bonds have reached R16.5 billion; more than double the R7.2 billion in the same period last year.

Last week’s SARB decision may put the brakes on the Rand rally going forward, as lower rates steal momentum from the strengthening local currency. Also, continuous downward pressure on the Rand can be expected as South Africa moves to lower rates amidst US and EU rate-hiking cycles. Strong bond yields should, however, help insulate South Africa from capital outflows as the policy paths of the SARB diverge from those of the Fed, BoE and ECB. Going forward, the Rand can be expected to gravitate around support levels of 11.83 to the Dollar.

 

Day What’s happening Why it’s important
Tuesday April 3 11:00 ABSA Manufacturing PMI March The PMI is forecasted to improve. Positive manufacturing numbers contribute to a more positive outlook for the local economy, which would be bullish for the local currency.
Friday April 6 11:30 SACCI Business Confidence March Business confidence is forecasted to pull back slightly. However, given recent local positives, a better than forecast result is on the cards, and would be bullish for the Rand.

 

– John-Edward Ferreira
1st Contact Forex