While the performance of the rand this week would be closely linked with the global risk sentiment, analysts believed it could react positively to another interest rate cut. Photo: Karelien Kriel/Pixabay
While the performance of the rand this week would be closely linked with the global risk sentiment, analysts believed it could react positively to another interest rate cut. Photo: Karelien Kriel/Pixabay

Another interest rate cut could give the rand some much-needed impetus

By Given Majola Time of article published May 18, 2020

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DURBAN – While the performance of the rand this week would be closely linked with the global risk sentiment, analysts believed it could react positively to another interest rate cut.

The domestic currency firmed as it ranged between R18.35 to R18.61 to the dollar on Monday.

At 5pm the rand was bid 17c stronger than the same time bid on Friday at R18.40 against the dollar. Against the pound, it was 3c stronger at R22.46 and bid at R20.06 against the euro. 

Global head of market research and currency strategy at FXTM Jameel Ahmad said due to very weak global demand and the impact this would have on an open economy such as South Africa’s, it was very much on the cards that the SA Reserve Bank could cut interest rates once again when they meet later this week.

It certainly should not be ruled out. “It is no hidden secret to anyone that South Africa’s fundamentals are very weak and this position will only face deeper threats when global economic weakness rings home, meaning unemployment rates will face a large stretch and sadly a lot of domestic businesses will question whether they can survive,” said Ahmad. 

FXTM said lower interest rates were not the holy grail of medicine to what is obviously a global health disaster, but there was still scope for the SARB to reduce interest rates to help the economy. “Investors would react positively to such a move if the central bank is able to proactively deliver the message that it will do whatever it takes to support the economy,” said Ahmad.

Investec’s Annabel Bishop said South Africa’s domestic currency was, however, lagging both the recovery in emerging market currencies and in commodity currencies, with the economic growth outlook worsening substantially each month. “The lengthy lockdown, and further substantial extension of it, will drag down both the length of South Africa’s recession and also deepening and flatten its U shape,” said Bishop.

She said the rand would remain volatile, vulnerable to both international market sentiment and events. “The erosion of South Africa’s interest rate differential with those of advanced countries will not promote rand strength, nor will interest rate cuts promote growth while South Africa’s highly restrictive lockdown on economic activity remains in place.”  

This week, we have the SA Reserve Bank Monetary Policy Committee decision on Thursday.

Meanwhile, JSE stocks rose with the blue-chip Top40 index lifting 3.75 percent to 47 673.54 points while the broader all share index also increased 3.53 percent to 51 382.06 points.

The biggest earners were Hammerson which gained 18.19 percent at R12.80 followed by Northam with 12.06 percent at R98.50 then Sasol with 10.30 percent to R85.37. Anglo increased by 10.29 percent at R357.45 while African Rainbow Minerals lifted 10 percent to R148.50.

The biggest losers were Globe Trade Centre SA which shed  37.94 percent to R19.99 followed by Astral dropping 5.24 percent to R171.52 while Netcare decreased by  1.99 percent to R1377. Italtile lost 1.81  percent at R9.79 and Altron losing 1.27 percent to R19.45.

BUSINESS REPORT

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