South African Rand Recovery? Barclays and R.M.B Sceptical

The pound to rand exchange rate has fallen lower once more as the ZAR stages a recovery from the eye-watering sell-off seen earlier in the week. How far can the currency go though?

The rand has recovered from recent historical lows against the British pound as traders step into the market to pick up a discounted currency.

While we have seen some rand gains caution is elevated and liquidity is still slightly constrained.

The “flash crash” damage is still evident in wider bid-offer spreads, most importantly in the spot market but more accentuated in the derivative space confirming that the actual market structure around ZAR has been heavily damaged.

What rand-watchers will be interested in however are the prospects facing the unit of coming days and weeks.

Local markets are still trying to absorb what is now being called the “flash crash” — yesterday morning’s extreme moves in the rand — the second in four months.

We noted that a Japanese bank may have sparked the move having liquidated some of their holdings in ZAR. But, this should not be mistaken for the cause of the sell-off. Rather thin markets conditions confirm a lack of participants in the ZAR arena; a situation that allows what should be one-off events to spread like a tsunami.  

“In the early hours of Monday morning during illiquid trading conditions, the ZAR weakened sharply (9%) to a new all-time low of 17.91/USD as yield-hungry Japanese retail investors decided to cut their ZAR positions,” says a note from Barclays.

Confidence is therefore an issue and in such conditions all the market is likely to catch are speculators.

Latest Pound / SA Rand Exchange Rates

	Live: 22.6363▼ -0.07% 12 Month Best: 25.4721
*Your Bank's Retail Rate	21.8667 - 21.9572
**Independent Specialist	22.3194 - 22.41 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

“Market sentiment has been one of shock and this seems to have filtered into thin trade and we all wait and see where things are going,” says John Cairns at Rand Merchant Bank in Johannesburg, “given that yesterday’s moves were clearly abnormal, a case could be made that the rand should go back to where it started.”

So will the rand exchange rate complex return to last week’s levels? Don’t bet on it says Cairns:

“Sentiment, already so poor, has been hit hard and it seems the rand will hold on to at least 3% losses. There are a few technical levels to hold on to at these levels given we are in unexplored territory, but for now yesterday’s vaguely defined range of 16.50-17.00 should hold.”

Barclays are also pessimistic on the rand’s chances going forward:

“Although the ZAR has subsequently recovered some ground, sentiment remains extremely ZAR bearish. Over the coming days, if the language from this week’s Fed speakers causes US policy rate hike expectations to intensify even further, then we believe the ZAR is likely to continue falling to record lows.”

Longer-term the question now arises as to whether the South African Reserve Bank (SARB) can stabilise the markets.

Indeed, more analysts are suggesting that the lender of last resort may shift policy in response.

After the previous flash crash in August they put out a statement essentially saying that they could intervene if the rand market was disorderly.

RMB’s Cairns notes though that the problem for the Bank is that these extreme moves keep happening in Asian trade and then spilling into Joburg trade and sentiment. Its only option would be to be active around the clock.

So far, the Bank has been conspicuously silent this time around.

The other decision that the Bank will need to make is on interest rates come the MPC meeting in two weeks’ time.

“At this stage we think they will hike by 25bp, but a 50bp move cannot be ruled out if the rand remains at these or even weaker levels,” says Cairns.

One positive for the inflation profile and the country is the continued drop in the oil price: Brent has dropped all the way to US$31/bbl.

This should help the inflation-weary South African consumer and could underpin economic activity over coming months.