Strategic Finance

Rand vs the US Dollar: Bonds are the key driving force

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Strategic Finance
Written by Gary Howes   
Thursday, 29 July 2010

Research note on the South African Rand from Standard Chartered.

 

Standard Chartered, the London based bank that specialises in Africa and Asia, has given some insight into what they see as the key drivers behind the value of the South African Rand, particularly in relation to its relationship against the US Dollar.

In Standard Chartered's weekly foreign currency technical report, analysts point out that the South African rand (ZAR) has so far gained some +5.28% on the month against the US Dollar.

And these gains in ZAR USD are supported by a combination of bond and equity-related inflows.

Standard Chartered say:

"The respective exchanges suggest that foreign investors have so far been net buyers of ZAR 23.93bn worth of SA stocks and ZAR 52.70bn of SA bonds year-to-date through 23 July.

"As we have found previously, the ZAR tends to be more of a ‘bond currency’ – outperforming when the South African Reserve Bank (SARB) is cutting interest rates, while under-performing when the SARB is hiking."

Given the weak data that is presently coming out of South Africa, there is a risk of further monetary easing.

In the context of broad USD weakness, this may mean that the ZAR has further to strengthen near-term, supported by these bond market inflows.

 

Rand and the Pound: Where to?


Earlier this week Spread Trading South Africa carried some insight into the relationship between the Rand and the British Pound.

The Rand rallied on Monday against the British Pound as speculation grew that HSBC would acquire South African firm Nedbank. The deal would require the purchase of a significant tranche of South African Rand, which helped the currency tick higher against other units.

In other news, the South African central bank kept interest rates unchanged at 6.5% last week. The last change was on March 25th when they cut rates by 0.5%.

Analysts expect them to remain on hold for some time to come.

The technical outlook is negative. We have recoiled from the 11.75 level and now look set to sell off back to the 11.05 level that marked the late June low. Buyers of the Rand should consider hedging any exposure now.

 
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