South African Rand Firm Ahead of Key Moody's Review

Johannesburg, South Africa, Image © Adobe Stock

- ZAR rises as Dollar advance is checked by bond, stock sell-off.

- Price action comes ahead of Moody's rating decision, due Friday.

- And after central bank heavyweight appointed as finance minister.

The Rand cruised higher against rivals in the final session of the week after the Dollar's advance was checked by an earlier sell-off in American stock markets, but Moody's latest rating decision now looms large over South Africa.

Moody's review is one of the highlights of the month for the Rand, but there is speculation it could be delayed if the agency elects to wait until after the Medium Term Budget Policy Statement (MTBPS) on 24 October.

"However, we expect a review today, and no change either to outlook or rating," says Zaakirah Ismail with Standard Bank.

In its first-half 2018 rating review, Moody’s kept South Africa's credit rating at investment grade (Baa3) with a stable outlook, just about at the "investment grade" level. 

This was after President Cyril Ramaphosa's medium term budget plan set out a programme through which South Africa could stem the rise in, and eventually reduce, its budget deficit through a mixture of tax increases and austerity.

"Moody's said the recovery of institutions in South Africa would, if sustained, kick-start the economy as well as provide a stabilization of fiscal strength. This is a process which is currently underway and we think that Moody's will keep the rating and outlook unchanged, in spite of some disappointing growth data since the March review," says Cristian Maggio, head of emerging market currency strategy at TD Securities.

However, since then the South African economy has fallen into recession, with GDP declining -0.7% in the second-quarter after posting a -2.6% fall in GDP growth at the start of the year.

2018's recession will slow the rate of annual growth and raise pressure on the government to further consolidate its finances, otherwise it would risk missing the deficit targets pledged to markets. 

That would lead to a renewed threat of a downgrade to South Africa's local currency credit rating. Moody's will release its decision late in, if not after the close of, the London session.

An eventual loss of investment grade status would be destructive for the Rand as well as the economy, because it would accelerate capital outflows from the country as many international investors would be forced to jettison its government bonds from their portfolios.  

"He was regarded as one of the best central bankers worldwide and left a huge hole even if the SARB continued Mbowebi’s policies in the end. The rand might be able to once again benefit from this credibility. By appointing Mboweni the President has landed a real coup and was able to overcome this latest wave of uncertainties. The challenges for his government nonetheless remain high in the current environment – and as a result we urge caution in connection with the rand," says Elisabeth Andreae, an analyst at Commerzbank. 

Above: Pound-to-Rand rate shown at daily intervals.

Friday's rating decision will come just two days after President Ramaphosa accepted the resignation of former finance minister Nhlanhla Nene and appointed Tito Mboweni, the first black governor of the South African Reserve Bank, as his replacement.

That move came after it emerged Nene had previously withheld details of a past relationship with the Gupta family, an Indian dynasty at the centre of a "state capture" scandal that helped bring down the Jacob Zuma presidency.

Nene admitted in testimony to the state capture commission of inquiry that he had visited the Gupta family's home on a number of occassions while serving as deputy finance minister under former president Jacob Zuma and at least once after having been appointed as finance minister on the first occasion back in 2015, according to South Africa's News 24.

Corruption in and among the state apparatus and corporate governance within state-owned-enterprises has been a key concern of rating agencies and investors alike. Moody's previously said South Africa's finances will be helped if Ramaphosa's government is able to get the house in order. 

"The ZAR is under-valued and the implied yield on the 3m forward is attractive at 7.3% annualised. Yet the China story will take its toll on theZAR. 14.00/14.15 is now really big support for USD/ZAR," says Chris Turner, global head of FX strategy at ING Group.

South Africa's currency has seen year-to-date losses of up to 20% in 2018 given a relentless advance of the U.S. Dollar and litany of other factors that have put the Rand on the back foot. 

However, Wednesday's carnage in U.S. bond and stock markets dented the Dollar's allure to speculators and provided emerging market currencies like the Rand an opportunity to recover some lost ground. 

This saw the USD/ZAR rate decline from 14.75 Wednesday to 14.44 by Friday, while the Pound-to-Rand rate has retreated from 19.49 to 19.05.

"With the US Dollar index anchored at 95 and US Treasury yields off their multi-year highs, we expect USD/ZAR to trade comfortably in a 14.50 to 14.80 range," says Nema Ramkhelawan-Bhana, an economist at Rand Merchant Bank. "That isn’t to say that whispers of trade wars couldn’t easily dislodge EM currencies."

Above: USD/ZAR rate shown at daily intervals.

Advertisement
Get up to 5% more foreign exchange by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here