Rand plunge creates inflation fear factor for SA Reserve Bank

Matthew le Cordeur

Cape Town – The SA Reserve Bank (Sarb) will be keeping a careful eye on the rand on Monday, while analysts speculate on a further interest rate hike in November following the currency's dramatic plunge.

The rand briefly fell to its lowest recorded level of R14.07/$ overnight and steadied out at R13.20/$ by 12:30 on Monday.

The Sarb will be “keeping very close to the market”, emerging markets economist Peter Attard Montalto told Fin24 by email.

“We often joke that the Sarb would never intervene unless you had a disorderly move from say R13/$ to R14/$,” he said. “And lo, that move has happened. However, this was out of hours and in such low 'Sunday' liquidity. I don't believe Sarb would have intervened overnight, given they have no pre-committed intervention plan or leading open orders in my view.”

Probability of Sarb intervention on the rise

He said the probability of intervention has certainly gone up. “They will be keeping very close to the market today and local dealers and may have some optionality to take some government and parastatal flow through reserves today to reassure the market (at the margin).”

Montalto said the move reinforces the inflation fear factor for Sarb Monetary Policy Committee (MPC) members. “A key narrative in past from some MPC members has been fear that large moves can ‘open up’ the way for market to move in a sticky way higher and higher.

“That puts September’s MPC now in play on both domestic factors as well the Fed,” he said. “Let's see how the rand trades in the next few weeks, but the probabilities are tilting now to 50:50 with November’s interest rate decision.

“The Sarb may not actually say anything today on this, as they do not like to get trapped in mind games with the market on forex policy speculation, although this is a pretty unusual move,” he said. “Remember they still feel stung from the total mismanaged failure that was their intervention in the rand crisis of 2001-2.”

Rand will regain ground - FNB

First National Bank (FNB) believes the rand is undervalued and should regain some ground once some of the poor sentiment dissipates, according to its chief economist, Alex Smith.

It is in line with other emerging market currencies, especially those linked to countries that are commodity exporters. Commodity prices have been coming down, with the Bloomberg commodity price index moving to a 16-year low on Monday.

The weakness among emerging market currencies reflects concerns over China’s economy and the possibility that the US Federal Reserve will soon lift interest rates, Smith explained.

Weakness in China is hurting demand for these countries exports and is lowering the prices of these exports (particularly raw commodities). The start of an interest rate hiking cycle in the US is likely to be associated with a period of weaker capital flows into emerging markets, he added.

Source http://www.fin24.com/Economy/Rand-plunge-creates-inflation-fear-factor-f...