South African Rand Is Prime Beneficiary of Draghi Stimulus Talk

JOHANNESBURG (Capital Markets in Africa)  – South African rand posted its best advance in more than two months Tuesday after a trifecta of good news: dovish statements from the European Central Bank, a positive turn in the trade saga, and a pledge further government support for the beleaguered power utility Eskom Holdings SOC Ltd.

The rand strengthened as much as 1.9%, leading emerging-market currency gains against the dollar. It’s the biggest one-day move since April 1, and has been large enough to reverse the rand’s losses against the greenback in the month to date.

The South African currency traded at 14.5450 by 3:56 p.m. in Johannesburg. It’s now breached the 61.8% Fibonacci retracement level, after bouncing off the 76.4% level earlier this month. If it sustains its advance below 14.70, it could strengthen to 14.39, and then 14.08, the Fibonacci chart shows.

President Cyril Ramaphosa said he would announce further support measures for Eskom, which is crippled by debt and doesn’t generate enough cash to service it. His statement coincided with a tweet by U.S. President Donald Trump that he will meet with Chinese counterpart Xi Jinping next week at the G-20 in Japan. Earlier, the European Central Bank president laid the groundwork for more stimulus to revive the euro-area economy, boosting appetite for risky assets.

While most risk currencies got a boost from Draghi’s comments, the rand was the biggest beneficiary. That’s because South Africa’s central bank appears less likely to cut rates in coming months than some of its peers, preserving is yield advantage, said Simon Harvey, a London-based currency analyst at Monex Europe Ltd.

“Despite comments regarding rate cuts from the SARB recently, it looks like growth stimulus will be focused through fiscal policy predominantly, so the improved carry climate should benefit the rand more,” Harvey said. Ramaphosa’s state-of-the-nation address to lawmakers on Thursday would provide more detail of fiscal plans, he said.

Source: Bloomberg Business News