Cape Town – Following a recent rally on the back of political developments, global factors have set the rand on a path of correction.
The rand opened at R11.79 on Thursday, after trading weaker since Tuesday. This followed the National Assembly's adoption of a motion for land expropriation without compensation, analysts from NKC Economics suggest.
By 09:45 the local unit was trading at R11.83 to the greenback.
RMB economist Isaah Mhlanga explained in a market update that the rand’s movements are mainly influenced by global factors, particularly US dollar strength.
“The mediocre performance in both the rand and bonds over the past two days partly reveals how the market focuses on the negative part of local developments while completely discounting the positive aspects,” said Mhlanga.
Locally the outcome of Moody’s review later in March is the next big event risk to the currency.
Mhlanga added that the January trade deficit of R28bn, the biggest since the 1990s, as well as the lower PPI inflation (5.1%) reported on Wednesday do not change views that inflation could trend closer to 4% in February and March. RMB is of the view that lower inflation would prompt the Reserve Bank’s monetary policy committee to introduce a rate cut of 25 basis points at its next meeting in March.
Bianca Botes, corporate treasury manager at Peregrine Treasury Solutions, explained that the rand correction is mainly driven by dollar strength, following the Federal Reserve’s meeting. “Markets are now anticipating more than the initial two or three US interest rate hikes this year.”
She is also of the view that local developments related to land reform are a driver of the correction. “Until markets have certainty regarding constitutional changes to property and land ownership rights, investors will be extremely hesitant to invest in South Africa,” she warned.
“An amendment to the Constitution is also seen as a threat to the stability of our democracy, leaving investors wondering what part of the Constitution will be challenged next,” she explained. The rand could reach R11.90/$.
However Adam Phillips, Treasury specialist at Umkhulu Consulting, doesn't think land reform is the reason the rand lost its gains. He believes the risk of more rate hikes in the US has more weight.
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