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The South African rand continued its good form against the dollar, gaining for the third day in a row on Tuesday (September 15), to a better month.
Hopes for a Covid-19 vaccine and a rebound on Wall Street have improved risk appetite and seen the dollar weaken, TreasuryOne noted.
Reuters reported that AstraZeneca resumed British clinical trials of its Covid-19 vaccine on Monday, while Pfizer Inc and BioNTech SE proposed over the weekend to expand their phase 3 vaccine trial.
Investors are also waiting for the Federal Reserve’s policy meeting on Wednesday to assess the markets outlook following a drop of about 2% in global stocks this month, Bloomberg said.
The Fed is expected to maintain its dovish stance after previously saying that it will shift to a more relaxed approach to inflation.
“Market volatility is making a comeback after months of steady advances in risk assets,” strategists at the BlackRock Investment Institute led by Elga Bartsch said. “Valuations have risen, and as a result, we could see more volatility, especially as the US elections approach.”
Meanwhile, the rand gained 1.3% on Tuesday as risk sentiment takes hold after weeks of trading within the range, said Bianca Botes, chief executive of Peregrine Treasury Solutions.
He said that interest rate decisions due by the Federal Reserve, the Bank of England and the SARB are in the spotlight this week, with markets clearly bracing for further stimulus, at least from the Fed.
“The abundant liquidity resulting from the accommodative policy supports emerging markets, although the underlying fundamentals of these risk-driven markets may be questionable.”
“We are currently trading at a four-week high,” Botes said.
In Tuesday afternoon trading, the rand traded at the following levels against major currencies:
- Dollar / Rand: R16.43 (-1.40%)
- Pound / Rand: R21.19 (-1.02%)
- Euro / Rand: R19.52 (-1.30%)
The Reserve Bank’s policy meeting is due on Thursday, September 18.
“About 40% of economists forecast a 25 basis point cut, while 60% expect the buyback rate to remain unchanged. South Africa has already had aggressive monetary policy rate cuts worth 300 basis points in 2020.
“Despite the consensus forecast that there will be no change in the buyback rate, weaker-than-expected GDP and inflation, and the strengthening of the rand provide the possibility of a further rate cut at the September policy meetings. or November, “Overberg Asset Management said in a Note.
BNP Paribas said in a research note that it stands by its call for the Reserve Bank to cut the policy rate by 25 bps.
“We believe that the bank’s data-driven language, which materializes downside risks to GDP and recent support from the ZAR, will influence a still divided monetary policy committee,” said Jeff Schultz, senior economist at BNP Paribas.
“However, the risks of a ‘no change’ stance are not negligible, as the committee is likely to be aware of the need to try to keep rates as stable as possible next year amid still large fiscal risks.”
Although looking back, the 51% quarter-on-quarter slip in second-quarter GDP highlights that the SARB will likely have to revise down the 7.3% contraction it currently has for 2020 GDP, the economist said.
“More revealing, in our opinion, will be whether the central bank is starting to lose faith in its estimate of a healthier recovery in GDP in 2021, which sees an average of 3.7% versus our own estimate of 2.5%.”
He said the bank sees room for downward revisions as some of the structural weaknesses, such as power outages, that plagued the economy before the virus outbreak, have returned.
BNP Paribas said that as the SARB nears the end of its haircutting cycle, any future decision policy rate is unlikely to be unanimous and will be highly data-driven, considering the considerable fiscal risks in the system.
Read: Push to reopen South Africa’s international borders next month
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