Article / 07 June 2016 at 12:00 GMT

There's hope for South Africa's rand despite S&P's downgrade

Head of Private Sales / Saxo Capital Markets - South Africa
South Africa
  • Rating agency S&P downgrades South Africa to BBB-
  • A further downgrade to 'junk' status would hurt economy badly
  • Rand could strengthen as long as status does not worsen


Now, he's not bothered by what S&P has to say about South Africa. Photo: iStock

By Dylan Bester

South Africa has been issued with a BBB- credit rating from credit-rating agency Standard & Poor's which is one level above “Junk” status, with no credit downgrade and on borrowed time before the next rating agency valuation.

USDZAR movement

Interest-rate hikes in South Africa have been adjusted twice already this year and moved higher to 7%, which has provided strength and higher-yield potential in our local bond market.

Close monitoring of the next credit rating agencies outlook is essential. Key focus points on the credit rating is GDP growth, scandals around President Zuma and large budget deficits.

A downgrade to “Junk” status would be terrible for the local economy and the rand as most of our budget deficits are financed from US debt which brings us to US interest rates.

The US interest-rate outlook and Janet Yellen's Federal Open Market Committee speech was positive although the focus still remains heavily on data points being released in the labour market and the most recent nonfarm figures were disappointing.

The likelihood of a US interest rate hike in the next two months is unlikely and even the prospects for September are dimming with a lot more focus on interest rates driving the overall market direction.

The most recent strength for the rand from R15.86, has shown the willingness of investors to move from US debt instruments into riskier assets like the South Africa market to achieve the higher yield. This means that the attractiveness of the yield locally, with the risk of a downgrade is being downplayed and our risk to reward is positive.

Looking at technicals

Resistance at R15.86, the recent high, has been confirmed and there is a larger wedge formation appearing which is shown from the two highs indicated and the last high at R15.85. The bottom of the wedge formation touches the recent lows at R14.20.

Rand strength is heading towards the recent lows of R14.26, which could pick up some dollar buyers and head up towards the top of the wedge.

 Source: Saxo Bank

Any comments from the local monetary policy committee meetings and the continuation of rate hikes being pushed further out would strengthen the rand and move it towards the R13.88 level.

The credit-rating issues are still hovering  and any confirmations of growth in GDP or shrinking of budget deficits will provide more assistance to the rand towards stronger levels at R13.


What happens in the Fed will impact the rand, but the trajectory on
interest rates has been pushed down the line. Photo: iStock

— Edited by Martin O'Rourke

Dylan Bester is a trader on Saxo Bank's South Africa desk.


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