File image: IOL

CAPE TOWN - BMI research, a subsidiary of Fitch, yesterday said that the rand’s rally was nearing its end in the face of cooling market sentiment towards emerging market currencies and a gradual shift towards monetary easing in South Africa, and expected the SA Reserve Bank to embark on an even more gradual rate cutting cycle.
In an Africa Monitor research note, BMI said that the lion’s share of the rand’s appreciation was behind South Africa and after averaging R13.21 to the dollar in the year to-date, the group forecast the rand would average R13.03 against the greenback for the rest of the year.

“The rand’s multi-quarter rally is likely nearing an end, in the face of cooling market sentiment towards EM FX and a gradual shift towards monetary easing. Over the long term, structurally high inflation and tepid growth look poised to exert further downward pressure on the rand.

“Should we begin to see appetite for riskier assets fade, the detrimental impact on the rand of political machinations could be far more long-standing, increasing the potential for greater-than expected imported price pressures,” BMI said. The research note came just a day before today’s expected review of South Africa’s credit rating by Moody’s.

The rating agency spooked the rand to a three month low last week when it released its research note on South Africa and warned that pressure seemed to be growing on the central bank, and the Treasury, to implement expansionary policies.

Moody’s said while it welcomed the central bank’s first interest rate cut in 2012, it also indicated political pressure on the bank. The rating agency also warned that it viewed the Reserve Bank’s independent monetary policy as a key pillar in its assessment of South Africa’s gradually deteriorating institutional strength.