Johannesburg - The Reserve Bank’s plan to drain liquidity from the money market may curb volatility in the rand at a time when the currency is trading close to a four-and-a-half-year-year low.
The rand’s three-month implied volatility against the dollar fell 10 basis points on Friday to 16.75 percent, the most of 16 major currencies monitored. The rand’s implied volatility has dropped 215 basis points since reaching an 18-month high on June 20, indicating that options traders are expecting price swings to moderate.
The central bank wanted to reduce supply in the money market to ensure that banks depended more on its repurchase facility for their liquidity, it said last week.
The move, which may boost costs for currency traders as short-term rates rise, comes as central banks from India to Brazil take steps to arrest currency declines and after a 17 percent fall in the rand against the dollar this year.
The Reserve Bank does not target a level for the rand and has said it would not adjust interest rates or intervene to manage the currency.
“This is signalling to the market that the Reserve Bank has some weapons in its armoury, even if it is reluctant to drain foreign exchange reserves or raise the policy rate to support the currency,” Michael Grobler, a portfolio manager at Atlantic Asset Management, said on Thursday. “The Reserve Bank isn’t completely sidelined.”
The planned reduction in money market liquidity was in response to growth in the assets of commercial banks and notes and coins in circulation and might require lenders to hold more liquid assets, the central bank said.
“The Reserve Bank deems it necessary to increase the level of the money market shortage to a more appropriate level over time,” it said.
The central bank uses debentures and foreign exchange swaps to reduce liquidity in the money market, where dealers trade in short-term financial instruments such as commercial paper, negotiable certificates of deposit and treasury bills.
The adjustment was not being made in response to rand weakness and would not have a “direct bearing” on foreign exchange trading, said Leon Myburgh, the head of the central bank’s financial markets department.
It should not be interpreted as a monetary policy signal, the central bank said in a statement.
“They’re clearly concerned that there might be excess liquidity in financial markets,” Michael Keenan, a currency strategist at Absa Capital, said on Thursday. “This is prudent monetary policy. They’re ensuring that there is no excess liquidity floating around because that could lead to inflation, and this would be a way of curbing that.”
Short-term money market rates may rise as liquidity decreases, according to analysts including Peter Kent, a portfolio manager at Investec Asset Management. Currency traders commonly finance their positions using money market instruments.
“The timing of the announcement is unfortunate; it has coincided with a lot of volatility,” Kent said last week. “The market’s instinctive reaction to link the two is not surprising, given the timing. There is some indication that the market is pricing in a tightening of short-term liquidity.”
Brazil’s central bank announced a $60 billion (R614bn) intervention programme that started on Friday to stem the real’s 14 percent slump against the dollar. Indonesia said on Thursday that it planned policies that might include fiscal stimulus, while the Reserve Bank of India said the nation’s economic and monetary policies should focus on preserving financial stability.
South Africa’s central bank was committed to a flexible exchange rate, though it would be concerned by “abrupt and disorderly movements”, deputy governor Daniel Mminele said on May 30, after the rand had depreciated 10 percent against the dollar that month.
The currency fell to a four-and-a-half-year low of R10.44 a dollar on Thursday last week.
The central bank was unlikely to depart from its non-intervention policy, said Peter Attard Montalto, an emerging markets economist at Nomura International. – Bloomberg