The rand faces a tough week ahead with a number of key data releases that could push the local unit to a fresh 13-year low. Continued weakness in the rand will boost local inflation and build the case for a rate hike.
The first key test of the week will be the local current account deficit figures due today and inflation data tomorrow. They are expected to show conditions remain shaky, opening the door to further falls in the currency and outflows of investment.
Consensus expectations are for 5.8 percent of gross domestic product (GDP).
“A very bad (current account) figure could set the rand running on its own,” John Cairns, a trader with Rand Merchant Bank, said yesterday. He added that if the deficit surprised and failed to contract to the 5.5 percent of GDP forecast, the currency could suffer.
The rand strengthened to R12.4409 against the dollar at 5pm after a report showed that US factory production declined for a third consecutive month. Yesterday, the rand weakened to R12.5173, which was very close to last week’s 13-year low of R12.5251.
The current account gap sits at 6 percent of GDP and has been cited by ratings agencies as a major constraint on growth and a risk for the country’s credit status.
“While the deficit is expected to contract further this year, we seem to be struggling to fund it: foreigners have turned net sellers of bonds year-to-date,” Cairns added.
Bidvest Bank said a relatively stronger GDP noted in the final quarter of 2014, in conjunction with some relief on the import bill stemming from lower global energy prices, could result in a further compression in the current account deficit in the fourth quarter.
“However, factors such as aggressive rand weakness, still rather robust government infrastructure spending and supply-side impediments to South Africa’s ability to produce export goods, suggest that risks are skewed towards the current account deficit remaining sizeable into 2015.”
It said this view was further supported by softer global commodity prices and still sluggish demand weighing on exports, with the slowdown in major trading partner, China, posing a particular downside risk.
Econometrix said the current account deficit had only dipped marginally below the 5 percent mark in one quarter since 2011. It said what this implied was the need to attract even stronger foreign capital to help plug the deficit and the failure to do so had left the bulk of the corrective process to the rand which, since 2011, had been in a steady weakening trend.
“In order to inspire investor confidence and help reduce the trade deficit at a time when export demand is weak, interest rates need to be raised more significantly, which the SA Reserve bank remains loath to do.”
For a world economy coming to terms with a soaring dollar and a plunge in oil prices, this week will be all about the US Federal Reserve’s policy meeting and its intentions on interest rates. After successive months of strong jobs data, expectations have been growing that the Fed will point towards a June rates rise by dropping a pledge to be “patient” in considering such a move.
JP Morgan Chase expects the Reserve Bank to hike interest rates to 6 percent in November against an earlier estimate of the second quarter of 2016, the bank’s economists commented last week.
“The SA Reserve Bank has repeatedly stressed its concerns about the potential impact of impending US monetary policy tightening on the rand and inflation projections.”
Consumer price index (CPI) inflation slowed sharply from 5.3 percent in December to 4.4 percent in January, marking the softest print since early 2011. The CPI inflation rate for February is expected to have declined for the sixth consecutive month.
Laura Campbell, an analyst at Econometrix, said a key source of downward pressure on the CPI inflation rate in February would have emanated from a decline in the petrol inflation rate. “Given that petrol has a weighting of 5.68 percent within overall CPI, this will have exerted downward pressure on the February CPI inflation rate.”
She said it was possible the food inflation rate had declined once again in February.