Photographer: Waldo Swieger/Bloomberg

South Africa's Surprise Rate Cut No Death Knell for the Rand

  • High real yields will continue to attract buyers: Aberdeen
  • Bonds gain with stocks as central bank lowers borrowing costs

South Africa’s first interest rate cut in five years, and a surprise one at that, probably won’t be enough to break the rand’s resilience.

The currency fell 0.9 percent against the dollar on Thursday after the South African Reserve Bank reduced its key rate to 6.75 percent from 7 percent to boost an economy in recession, defying 20 out of 23 economists in a Bloomberg survey who predicted no change. But it recovered most of its losses on Friday as it strengthened 0.7 percent to 12.9492 as of 5 p.m. in Johannesburg.

The rand has been one of the main beneficiaries of an emerging-market rally this year, driven by the belief that the U.S. Federal Reserve will only enact rate increases slowly. The high returns on South African bonds mean it’s unlikely to weaken much, especially as the central bank will be cautious about further cuts with inflation near the top of its target range of 3 percent to 6 percent, according to Aberdeen Asset Management Plc and Rabobank.

“It’s not obvious why the currency should weaken from here,” said Kevin Daly, a money manager in London at Aberdeen, which oversees $11 billion of emerging-markets assets, including South African debt. “We’re still looking at very high real rates and it’s not like these guys will be on a rate-cutting spree like Brazil. They’re very limited in what they can do.”

Local bonds were boosted by the rate decrease, with the yield on the government’s benchmark notes due in Dec. 2026 dropping three basis points Friday to 8.52 percent, the lowest in more than five weeks, following a 10-point decline Thursday. The benchmark equity index fell 0.2 percent on Friday.

“It is a much-needed move from the Reserve Bank,” said Michele Santangelo, a fund manager at Johannesburg-based Independent Securities. “It’s probably much needed in terms of giving us some stimulus and to make costs of financing and borrowing a little bit cheaper.”

Read more: South Africa Cuts Key Rate for the First Time in Five Years

The rand was also bolstered when the dollar dropped after U.S. investigators were said on Thursday to be examining a broad range of transactions possibly linking President Donald Trump’s businesses to Russia.

“This suggests the Trump administration won’t be focused on fiscal measures and will instead be trying to limit damage from these investigations, which is a reason we don’t expect the dollar to strengthen,” Piotr Matys, an emerging markets strategist at Rabobank in London, said. “I don’t expect today’s decision in South Africa to weigh on the rand long. The overall message was that the central bank will be extremely cautious. Sentiment toward risky assets is positive.”

The rand will remain attractive to carry traders even if the SARB reduces it repurchase rate by another 50 basis points, according to Standard Bank Group Ltd. Foreign investors were net buyers of 1.01 billion rand ($78 million) of South African stocks and bonds Thursday.

“We believe that yesterday’s repo rate cut won’t affect the rand adversely,” Standard Bank strategists led by Walter de Wet said in a note. “In fact, short-term foreign inflows may actually aid it. We foresee at least another 25 basis-point cut, but possibly another 50 basis points, without raising the risk from an interest-rate differential perspective enough for the rand to depreciate.”

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