Rate Cut unrealistic in View of weak Rand

The rand turned weaker against the dollar today after strong gains overnight, with the latest US Federal Reserve minutes pointing to a scaling back of stimulus, which would take billions of dollars out of emerging markets.
The signal from the Fed has reinforced market expectations that South Africa’s own central bank has little scope to cut domestic rates later on Thursday, as it eyes inflation pressures stemming from a weaker rand.

The rand, which had rallied to a 2-1/2 week high R10.0515/$ overnight, retreated to R10.1900 by 08:38, down 0.37% from yesterday’s close. “The Fed minutes from the Oct 29-30 FOMC (Federal Open Market Committee) released yesterday reiterated the potential for the bank to begin tapering its quantitative easing programme soon,” Traditional Analytics said in a market note. “Markets interpreted this as a sufficiently dovish signal to climb back into long dollar positions.” Local government bonds tracked the rand weaker, with the yields for the benchmark instrument due in 2026 and the 2015 bond at the shorter end of the curve each rising 6 basis points to 8.195% and 6.02% respectively. The weaker rand will add pressure on domestic prices, leaving little room for the South African Reserve Bank to reduce interest rates despite weak economic growth.

The central bank (SARB) last cut its benchmark repo rate by 50 basis points to 5 percent in July 2012. It has left it unchanged since, with 21 economists polled by Reuters expecting another hold on Thursday when SARB concludes its final policy meeting for the year.

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