South Africa: Hungary For A Rate Hike?
Having depreciated by more than 38% against the US dollar year-to-date, the South African rand remains one of the worst-performing, major EM currencies. Even the Brazilian real and the Turkish lira, down by 25% and 31% respectively, cannot match the rand’s disastrous performance. While strengthening from a six-and-a-half-year low of ZAR11.8550/US$ on October 22, the currency has continued to trade below key support at ZAR10.9500/US$ for most of today. In my opinion, a sudden easing in global risk aversion is unlikely to occur anytime soon, and the threat of a new all-time low in the rand will remain substantial over the coming months. Indeed, a break below key support at around ZAR12.1500/US$ could push the rand into danger zone and open the doors for a slump beyond ZAR13.8000/US$, a level the currency has not seen since the December 2001 currency crisis.
Exchange Rate, ZAR/US$
With the rand potentially in freefall, the South African Reserve Bank could come under increasing pressures to hike the benchmark interest rate. As I highlighted a couple of days ago, the Hungarian monetary authorities have done exactly that and raised the policy rate by a massive 300bps in an effort to prop up the forint. In fact, with the SA 3×6 forward rate agreement (FRA) at one point yielding 12.32% on October 24, South African money markets are increasingly pricing in the possibility of an upward move in the benchmark interest rate (currently standing at 12.00%). Considering that until very recently FRAs have been suggesting a 50bps and 150bps cut in borrowing costs by the end of Q408 and Q109, respectively, a major shift in interest rate expectations seems to be on the cards.
3x6 Forward Rate Agreement
In my view, aside from bringing the South African economy closer to recession, an emergency rate hike à la Hungary would spell further disaster for the already battered Johannesburg All-Share Index (JALSH). On the back of declining precious metal prices and worsening domestic growth prospects, the index has declined by around 45% since its peak at the end of May. The bourse is currently testing key support at 18,150, and a slip below that level is likely to send the bourse towards 10,000, erasing four years worth of capital appreciation.
JALSH
October 24th, 2008 at 5:03 pm
What about domestic political risk? Imagine a second party forming in opposition to the ANC, Jacob Zuma going back on trial for corruption and now this mysterious disease. I wouldn’t want to be going to South Africa anytime soon!