Further dovish commentary from ECB Chair Draghi has pushed the rand to the top of the EM currency board this morning as the carry trade environment begins to lighten.
Despite global growth woes still prominent on investors’ minds, the prospects of lower interest rates and increased liquidity in the Eurozone prompted a surge into the rand and South African bonds this morning; a move that could be extended by a dovish shift from the Federal Reserve on Wednesday and by Ramaphosa’s State of the Nation Address on Thursday.
With global yields tumbling as a synchronised cutting cycle looms, the carry environment is set to benefit the rand as growth stimulus is predominantly set to be channelled through fiscal policy as opposed to substantial monetary easing.
For this reason, a dovish shift by the Federal Reserve on Wednesday evening could extend the rally seen in South African assets this morning.
Even though we expect the Fed to not meet the aggressive expectations of the market, any hints at cutting rates could be sufficient for rand to continue in a positive light. Further, foreign investors eyes will remain on Ramaphosa’s five year plan which is set to be outlined on Thursday.
The President’s plan to open up access to South Africa’s economy and financial markets will be under the market’s microscope, along with plans to promote growth and restructure State Owned Enterprises, especially given the prospect of lower funding costs in the Eurozone and United States for investments.
In the context of a broader Emerging Market move, the rand is head and shoulders above the rest this morning as the South African Reserve Bank is unlikely to cut rates as aggressively as other EM central banks.
Draghi sends the rand on a run as EURZAR pushes USDZAR lower
Rates in India, Russia, Brazil and arguably Mexico are set to fall more aggressively over the course of 2019 than rates in South Africa, pushing relative yields higher.
Although investments in South Africa continue to carry substantial idiosyncratic risk, for now the climate looks to be much more favourable as the woes of Eskom and divisions in the ANC party become more muted.