(12 APRIL 2019)DAILY MARKET BRIEF 2:ZAR strength remains despite major domestic issues
Considering the recent development in USD/ZAR, one has to admit that FX traders remain highly indulgent as to what concerns the South African rand. While both rating agencies S&P and Fitch have been downgrading South African government debt from investment grade to junk last year due to unfavorable budgeting and political turmoil, Moody’s has been the last-standing agency to grant investment grade. Yet a new assessment had investors worried that a downgrade to junk would have consequences on ZAR exchange rates and cause substantial capital outflows. However, none of it occurred since the rating agency postponement of the review maintains the rating Baa3, the lowest investment grade rating.
Despite the rating, it appears that the recent statement made by the agency doesn’t give much room for potential improvement: the South African Reserve Bank stands on its (hawkish) position that it should raise its repurchase rate by 25 basis points by the end of 2019 (currently: 6.75%) – although it’s been revising growth (from 1.70% to 1.30%) while inflation should remain stable (4.80%). Dragging issues relating to power supply shortage amid a massive indebted energy department and upcoming uncertain general elections on 8 May 2019 apparently do not bother investors, who have been favoring a positive risk sentiment and take long ZAR positions following dovish Fed and ECB monetary policies. Furthermore, recent drop of March business confidence for the fifth consecutive month as well as a decline in both month-to-month February mining (-1.50%) and manufacturing production (-1.60%) do not seem to have any impact on the currency.
There is definitely inadequacy considering current circumstances. The postponement of Moody’s rating decision from end of March to November boosted the rand, even though South African fragile economy and a forthcoming change in credit rating should have a negative impact on the ZAR. We therefore suggest investors to remain highly cautious.
