High interest rates in South Africa may continue supporting the rand in the coming months as investors continue to be attracted by the growing yield differential between United States treasuries and their rand-denominated equivalents, says global analyst firm Moody’s Economy.com.
“While the strong rand provides some anti-inflationary benefits by helping to temper imported tradeable goods prices, strength in the South African currency is also hitting local exporters in the hip pocket. Indeed, business confidence fell to its lowest level in three years during October, with firms finding it increasingly difficult to compete both internationally or domestically,” it adds.
The rand hit a series of fresh 17-month peaks against the dollar this week, briefly strengthening below R6,45 a dollar, bolstered by the prospect of another interest-rate hike in December and surging precious-metal prices.
“South Africa is the world’s largest producer of gold and platinum, and together these precious metals account for about a fifth of total export revenues. Thus, the rand and the resource-heavy JSE all-share index often move in step with precious-metal prices,” explains Moody’s Economy.com.
“Gold prices galloped to new 27-year highs during the week, getting a lift from the search for a safe haven as turbulence in global credit markets continued to weigh on investor sentiment. Gold prices also gained some strength this week from whispers that Beijing may raise the gold holding in its massive $1,4-trillion war chest of foreign reserves,” conclude the analysts.
Resilient consumers
Due to the fact that South African consumers are remaining resilient, next week’s retail sales figures will be scrutinised by policymakers and market watchers for any sign of cooling consumer demand, according to Moody’s Economy.com.
“Despite the South African Reserve Bank’s aggressive tightening campaign over the last year or so, raising interest rates by 350 basis points since 2006, consumer spending and demand for credit have shown surprising resilience to higher borrowing costs and remain at uncomfortably high levels,” note the analysts.
The analysts add that the release of the Reserve Bank’s Monetary Policy Review this week highlights the concern of monetary policymakers about runaway consumer spending and credit expansion.
They conclude that house-price growth remains “elevated”, though it eased to an annual pace of 13,6% in October from 14,4% in the previous month.
South Africa’s September retail trade data is due for release on Wednesday November 14 at 11am. — I-Net Bridge