The South African Reserve Bank (Sarb) denies intervening in the foreign exchange market to defend the rand, amid speculation of a cabinet reshuffle and after the midnight removal of Pravin Gordhan as finance minister.
“The Sarb policy approach is not to intervene in the foreign exchange market with the objective of influencing the exchange rate of the rand towards a particular range or level,” Daniel Mminele, deputy governor of the Sarb, told Moneyweb.
Despite the Sarb’s publicly-stated policy, the fact that the currency appears to be holding up “relatively well” after the latest cabinet reshuffle has sparked talk of intervention in the market.
The rand has declined by more than 7% against the dollar since Monday, when the Presidency ordered Gordhan and his former deputy Mcebisi Jonas to return to South Africa from London, effectively cancelling an international investor roadshow.
The currency is on course for its worst weekly performance since President Jacob Zuma unexpectedly replaced former finance minister Nhanhla Nene with relatively unknown ANC lawmaker Des van Rooyen in December 2015.
“In the past, when there was a crisis we could easily see the rand gapping by 20 cents to 30 cents. But [Thursday] night was different, it weakened by one or two cents at a time. It was gradual and much smoother, which suggests that there was participation in the market to provide liquidity,” said Dawie Roodt, director and chief economist at the Efficient Group.
He said it was likely that the central bank and banks, whose share prices move in line with the currency, provided liquidity by buying and selling the rand.
“They did not step in – it’s nothing special – they have always been there. They’re just making sure that there are no erratic movements in the currency.
“I’m not criticising them. I think it’s a sign of a well-functioning market because the decline was so gradual. They weren’t fighting it, they were just providing liquidity,” he said.
Gary Booysen, a portfolio manager at Rand Swiss, suspects that there is some form of intervention in the currency market.
“The Sarb could be intervening and it would be prudent for them to do so to stabilise the currency in the short term. It seems like institutions had contingency plans and were prepared. They’ve seen this movie before,” he said.
Booysen said it would be interesting to see if this is the case when reviewing the data, because it feels like the currency reaction to the announcement should have been far more exaggerated.
But Andre Cilliers, a currency expert and director at TreasuryOne, said the rand reacted to Gordhan’s firing in a similar fashion to Nenegate.
He said the currency weakened by 10.6% from 12.30 to 13.60 in the immediate aftermath of Gordhan’s removal, while it weakened by 11% from 14.30 to 16.20 after Nene was axed.
Based on his interactions with clients, he said there was more liquidity in the market in the run up to the rand hitting higher levels as importers were buying dollars around the 12.30 mark and exporters were issuing orders to sell at different levels as the currency weakened.
When compared with Nenegate, Cilliers said the period of rand volatility might be shortened and that the currency might pull back sooner as opposition against Zuma mounts.
“The president has, in this move, committed political suicide as he has split the ANC down the middle. We’re asking whether he will survive after 2017,” he said.
JustOneLap founder Simon Brown said it was unlikely that the central bank would intervene.
“The forex market is bigger than the Sarb and if traders see them defending a position they will trade against them. The traders are bigger and will win,” he said.
The so-called gradual depreciation of the rand may also be due to the markets having already factored in Gordhan’s removal and the probability of a credit rating downgrade.
Mminele said the Sarb adheres to a policy of a floating exchange rate and deals with adverse exchange rate movements, in so far as they may affect the inflation outlook, through appropriate monetary policy.
“This does not mean that we are indifferent to any challenges posed by excessive volatility or movements in the foreign exchange market. We would consider becoming involved if the orderly functioning of the foreign exchange markets is under threat, guided by financial stability considerations, not by any view to protect particular levels of the exchange rate,” he said.
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