The rand posted strong gains on Friday, as traders pushed out expectations for interest rate cuts in the wake of a hawkish monetary policy update from the Reserve Bank a day earlier.
However, some analysts said the scope for further rand appreciation was limited before the mid-term budget on 1 November given worries over the health of South Africa’s public finances.
At 3pm on Friday, the rand traded at R18.75/US$ to the US dollar, about 1% stronger than its previous closing level.
On Thursday, the Reserve Bank left its main interest rate on hold despite inflation being firmly within its target, with analysts seeing a hawkish tilt to its statement which stressed that deteriorating public finances risked fuelling price pressures.
Danny Greeff, co-head of Africa at ETM Analytics, said there had been a re-pricing of Reserve Bank rate cut risk.
“The interest rates swaps and forward-rate agreement curves have been steepening slightly after the SARB’s meeting, pointing to a market that is pushing out expectations for eventual rate cuts. This suggests that South Africa’s interest rate premium over funding nations will remain wider for longer, which will support capital inflows and the rand,” he said.
Fiscal position
Rand Merchant Bank analysts said in a research note that risks to the rand were mainly tied to the country’s fiscal position.
“Seeing any meaningful appreciation ahead of the medium-term budget policy statement in November is unlikely as investors wait for clarity,” they wrote. — (c) 2023 Reuters