By Mpho Hlakudi.
August is historically the rand’s worst month, and traders expect this year to be no different as questions about the central bank’s policy stance add to seasonal woes for South Africa’s currency.
The rand has clocked an average loss of more than 2% against the dollar in August since 1997, when Bloomberg started compiling the data. The currency is particularly vulnerable as the European summer holidays kick off, with traders reducing risk and taking profit on carry positions before their break, said Hironori Sannami, a foreign-exchange trader at Mizuho Bank in London.
“The rand, being one of the market’s favourite carry currencies, often finds itself on the receiving end of that seasonal position-squaring,” Sannami said.
The currency is already coming off a losing month in July as doubts crept in about a key pillar of support: the South African Reserve Bank’s hawkish bent. In a split decision last week, the central bank surprised the markets by keeping its policy rate on hold even as it warned about upside risks to inflation. The rand sagged more than 2% against the dollar immediately following that decision, and has yet to fully recover that loss.
“The market is looking for clarity as to whether the South African Reserve Bank’s reaction function has changed given how much inflation risk is on the line,” said Gina Schoeman, Citigroup’s economist for South Africa. The Wall Street lender closed its bullish position on the rand versus the euro following the policy decision.
The Federal Reserve’s hawkish hold this week piles more pressure on the rand, according to Mike Keenan, a fixed-income strategist at Absa Group. The rand has benefitted from its yield pickup over the dollar, which will erode if the Fed raises rates while the Sarb stays on hold. Absa’s interest-rate model suggests the rand should be trading at around R16.97 per dollar, Keenan said. That’s almost 3% weaker than its current level of around R16.50.
“The ongoing correction in global equity markets and the growing prospect of Fed rate hikes are likely to keep the rand on the back foot over the coming months,” Keenan said.
Meanwhile, foreign investors turned net sellers of South African bonds in July, with outflows of R6.2 billion ($376 million) through Thursday, compared with inflows of R9 billion the previous month. The government yield curve steepened as traders sold long-end bonds more aggressively on concerns about inflation following the rate hold.
“We were surprised along with the market pricing and overwhelming economist consensus,” said Ruen Naidu, a portfolio manager at Ninety One. While it’s too early to say that the central bank’s stance has shifted, “the early read is that the Sarb’s reaction function has shifted from ‘much higher’ to ‘moderately higher for longer, ” he said.
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