TreasuryOne’s Andre Cilliers on the robust Rand

TreasuryOne’s currency expert Andre Cilliers dives into the factors influencing the current rand/dollar price action. The dollar has retreated slightly since the Federal Reserve Bank signalled it would start to lift rates in March to contain soaring inflation. According to Cilliers, a 25-basis point rate spike will be a cruel slap for the markets. Countries round the globe have already looked at interest rates to put the Federal Reserve behind the curve. Last week, the Bank of England imposed a bank-back interest rate hike and began the process of quantitative tightening. South Africa’s interest rate hike trajectory can be uncovered by President Cyril Ramaphosa in the upcoming SONA. “There might be a further windfall income from the tax revenue base but I expect him to remain firmly on track with staying on the fiscal discipline path and not going for an overspending. That could be positive for the rand,” says Cilliers. – Sharidyn Rogers

On whether or not the dollar will strengthen with interest rate hikes in 2022

If you look at the inflation figures that came out and at the last Federal Reserve meeting where they clearly indicated they will most probably hike interest rates in March. Since then, the dollar has actually retreated slightly. At the moment, they’ve got the Federal Reserve a bit by the back end because can the Federal Reserve satisfy the markets? The only way is if they come out with an increase that’s more than what is expected by the market. They’ve moved in 25-basis point increments. If we look at what is discounted in terms of yields and rates at the moment, then already, a 35 to 40 basis point increase is pencilled in and discounted for in the markets for March. As we get closer to March, that is going to increase. So, if the Federal Reserve only increases by 25 basis points, it will actually be a disappointment to the market. The dollar will not react positively to that. The second reason why I say that is, if you look at the Bank of England, they’ve raised rates last week. Inflation in the Eurozone came out at record highs, even though there was a disappointment in terms of retail sales over the December period. South Africa has already raised rates. Countries across the globe are starting to look at interest rate increases as well, which puts the Federal Reserve behind the curve. As long as they are behind the curve, the dollar will not really strengthen.

On the developments of Turkey

Mr Erdoğan is not going to reveal secrets as to what can be expected of him in the near future. All that we do know about Erdoğan is that his behaviour will be erratic and unpredictable. So, it’s very difficult to say what we can expect out of Turkey. Erdoğan has learnt over the last couple of years that he gets slammed and hammered with extremely volatile moves, which doesn’t make the management of his currency or the management of his economy any easier. Hopefully, from that lesson, he will become a little bit less erratic and that might be slightly positive for the emerging market space in the sense that we could see less erratic movement from Turkey going forward.

On whether the geopolitical risk between Russia and Ukraine will impact emerging market currencies

I don’t think we’ll have a full scale war, but economic sanctions from the First World countries towards Russia will definitely impact negatively on the economy. Secondly, the cost of an invasion of the Ukraine will drain their reserves. Sanctions plus the cost means they cannot emerge as the winner. I don’t think they will immediately invade, but we will have some skirmishes and that will have an impact on what happens going forward. It will have an impact on oil prices and on what happens in the Middle East. It is a volatile situation but I don’t think Russia will emerge as a winner. If they don’t emerge as a winner, they will form part of the emerging market space, which could be a little bit negative for the emerging markets.

On whether the upcoming SONA and Budget Speech will be positive for the rand

In the upcoming SONA, Mr Ramaphosa is going to have the first opportunity to spell out what can be expected from them. He can put the slight positive spin on what can be expected out of the ANC; what kind of legislation can be expected; and what can happen in terms of welfare, pensions and grants. That can have an impact on what the minister will tell us. When the minister comes up and we look at tax income and so forth, some of the statistics he’s going to give us in terms of revenue collection is going to be positive. The deficit we run will be a little bit smaller as a percentage of GDP. There might be a further windfall income from the tax revenue base and would be positive for him. I expect him to remain firmly on track with staying on the fiscal discipline path and not going for overspending. That could be positive for the rand going into the Budget Speech and after the SONA.

On the technical performance of the rand/dollar price action

The technicals have got to break 15-60 if it wants to move higher. It has got to break 15-20 if it wants to go to a stronger side of the 14-80 or 14-90. There is no point in it going to 62 in the middle of the day and closing at 58; no point in breaking 15-20 and going to 15-18 and closing above 15-20 at the end of the day. You have to see it close below the 15-20 and below 15-60 to see a significant break. Those remain the firm technical levels. There are smaller levels in between but I do not regard that as important.

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