The rand bounced from two-year lows against the dollar on Thursday but remained vulnerable as investors dumped high risk assets, doubtful that the US Federal Reserve’s action to buy long-term debt was enough to boost the economy.
Global markets and emerging market currencies fell after the Federal Reserve highlighted “significant downside risks” but stopped short of more aggressive measures to boost growth, and the dollar gained across the board.
Domestic stocks will likely follow global markets lower. The JSE’s Top-40 December futures contract was down 1.1% before the start of trade at 7am GMT.
The rand recorded its biggest daily fall since October 2008 to hit two year lows at R8.33 overnight.
Government bonds followed the rand’s losses, with yields climbing to multi-week highs.
Finance Minister Pravin Gordhan said in Washington the rand was feeling the impact of global events.
Repo rate
Its sharp weakness is likely to feature prominently in the South African Reserve Bank’s (SARB) monetary policy committee statement at 1pm GMT after its three-day meeting deliberating on interest rates.
It is expected to keep the repo rate at 5.5%, striking a dovish tone on the domestic economy and cutting its growth forecasts.
“At this stage, we see growth concerns and deteriorating external conditions weighing in more so than any inflationary pressures in SARB’s rate-setting policy,” Danske Bank said in a research note.
“Significant worsening of growth outlook and external conditions could in fact compel SARB to engage in rate cuts and/or other forms of monetary loosening,” it said.
Indeed, money markets have factored in a small chance of a repo rate cut late this year or early next year but the sharp rand depreciation may limit further monetary loosening.
Same volatility expected
Gina Schoeman, senior economist at Absa Capital, said the Reserve Bank may want to see how long rand weakness will last before making a move.
She added that monetary policy was already accommodative and rates were likely to remain stable for longer.
The rand stood at R8.26 to the dollar at 6.30am GMT, 0.4% firmer than Wednesday’s New York close of R8.30.
“We are expecting pretty much the same volatility we’ve seen,” said Paul Chakaduka, dealer at Global Trader. “We might see some stability around R8.30 but if we convincingly break R8.40, then we have to look at R9/dollar.”
In the bond markets, the yield on the 2015 bond went up 22 basis points to 7.09%, after briefly hitting a six-week high of 7.11%.
The 2026 yield was up 17 basis points to 8.585%, off a two-month high of 8.605%. — Reuters