Rand strengthens ahead of Moody’s announcement

The rand strengthened against major currencies on Friday afternoon‚ with growing expectation in the market that ratings agency Moody’s would hold off on a two-notch cut that would bring SA’s credit rating to subinvestment grade.

The rand strengthened almost 2% against the pound‚ with sterling volatile against major currencies on the news that Conservative Party leader Theresa May had failed to win a clear majority in UK elections held on Thursday.

For some time‚ local markets have been expecting that Moody’s will downgrade SA’s credit rating by one notch on Friday. But news this week that SA had entered a technical recession raised concern about an increased possibility of a two-notch cut‚ to junk status.

On Thursday‚ Finance Minister Malusi Gigaba said that despite poor growth‚ the state was committed to reducing the budget deficit over the next three years to 3.3% of GDP.

A flash poll of market participants conducted by Japanese investment bank Nomura on Friday indicated the market expected a one-notch cut in the rating to Baa3 with a negative outlook.

“The central view of the market is therefore the same as our baseline. We see a one-notch cut on a weaker growth outlook with a negative outlook still on institutional concerns around National Treasury and the risks to fiscal [consolidation] from the low growth outlook‚” Nomura emerging market analyst Peter Attard Montalto said in a note.

Nomura estimated the likelihood of a two-notch cut at 17%.

“The big question is whether they also keep the outlook as negative. We do not think so but it is a close call‚” RMB analyst John Cairns said.

Moody’s was expected to release its decision at about 10pm local time. In the past‚ it has been kinder to SA than S& P Global Ratings and Fitch‚ keeping the country’s sovereign credit rating at Baa2 since November 2014.

S& P and Fitch cut SA to junk status following President Jacob Zuma’s controversial March Cabinet reshuffle.

At 3.30pm the rand was at R12.8882 to the dollar from Thursday’s R12.9251‚ at R14.40 to the euro from R14.4945 and at R16.4023 to the pound from R16.7281.

The euro was at $1.1174 from $1.1215.


Explainer: How rating agencies determine credit ratings?