Rand, bonds rally after Reserve Bank intervention

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Reserve Bank governor Lesetja Kganyago. (Bloomberg)
Reserve Bank governor Lesetja Kganyago. (Bloomberg)

The rand strengthened by almost a percent to R17.33/$ by Friday afternoon - after reaching R17.52 earlier in a volatile week of trading. It was last trading at R20.37 for a pound and R18.54 for a euro.

The currency received a boost from a rally in the bond market, triggered by a surprise intervention by the SA Reserve Bank.

After a steep interest rate cut of one percentage point on Thursday, the bank on Friday announced steps to ease liquidity in the market.

There has been a flood of selling in the market as investors try to raise cash to ease liquidity constraints.

The central bank responded by temporarily increasing the amount of cash in the system, says Anchor Capital co-chief investment officer Nolan Wapenaar.

It lowered the rate at which banks can borrow from it, while making it more expensive for banks to deposit cash at the central bank, forcing them to buy bonds.

This triggered a rally in the bond market, with the 10-year government bonds at 11.38% from above 12% earlier this week.

“We think that [these interventions] will prove to be more positive for the normal functioning of domestic markets than the extraordinary rate cut yesterday,” says Wapenaar.

Given the massive “sell everything” market turmoil we’ve seen over the last few weeks central banks globally have been forced to act, says Citadel fixed income portfolio manager Mike van der Westhuizen

“In the US and Europe particularly, further quantitative easing has been announced and there has been a massive effort to repair financial market ‘plumbing’ as it pertains to the shortness of collateral and liquidity available in system.

“The SARB has taken the lead of other central banks in providing measures to enhance liquidity to try and avoid additional strain on the banking system," said Van Der Westhuizen.

“The whole globe is in uncharted waters when it comes to dealing with a virus sparked financial market selloff. All hands are on deck to provide as much liquidity as possible to keep the financial system afloat and it is encouraging that the SARB is also on board. Question is, however, if things get worse what other triggers can the SARB pull?”

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