Sunday, January 17, 2021

Absa foreign exchange pundit sees Rand/Pula gains on Euro crisis

The deepening Eurozone debt crisis is not a laughing matter, but already the region’s strong currencies, the ZAR and the BWP will gain strengths from the problems.

The Rand and the Pula, the usually apolitical currencies, have been appreciating as they tracked the Euro/ dollar movements following news that European economies might default of bond payments.

Absa Capital FX Strategist Michael Keegan said this year there has been strong performance of the Rand versus major international currencies driven by amount of the inflows coming to the bond market.

“Foreigners are coming back to buy a lot of our bonds. If you look at ZAR and the bond market, they are at their 5 year highs,” Keegan said at Barclays Bank Botswana Economic Briefing And Currency Workshop.

He said Absa foresees the Rand going stronger and the Euro weakening further.
“We expect additional strength in the Pula during the HI (first half) of the year premised on the Euro/ Dollar and Rand forecast,” he added.

According to Bank of Botswana, in February, the Pula appreciated by 2.6 percent against the US dollar and by 0.6 percent against the Euro, but lost 1.9 percent to the Rand.

Motswedi Securities said on its weekly market wrap up that on a year to date, the local unit has firmed by 4.9 percent to the dollar, and by 2.6 percent to the Euro.

Against the rand, the pula has softened by 3.6 percent since the beginning of the year and this might have an effect on local inflation through imported inflation.

The Eurozone faces economic uncertainties as most countries face double dip recession with many governments throwing ‘money into the problems’ by putting money into the banking system.
There are fears that economies like Greece will default on bond commitments, but investors who hold the papers have positioned themselves for the eventualities.

The crisis is not only affecting currencies, but there is risk in the trade channel for exporting countries like BotswanaÔÇöa move that will affect the GDP growth.

Botswana macroeconomist, Dr Keith Jefferis, said Bank of Botswana is likely to keep interest rates level as inflation is driven by exogenous factorsÔÇöespecially fuel prices.

“I do not think we will have rate cuts in the short term. Bank of Botswana is looking at long term inflation target; whether inflation goes down in the next 12 months it is difficult to predict,” Jefferis said.

The Central Bank has left the Bank Rate unchanged at 9.2 percent for a while now.
However, Keegan believes the South African Reserve Bank could hike interest rates as early as November of this year.

Basil Rennias, a CFA Derivative Sales & Structuring at Absa Capital, advised local investors on hedging against risks.

However, Rennias said in Botswana there is not much one can do to hedge against inflation compared to South Africa.

Normally, investors hedge to mitigate risks of economic, transactional or translation dangers.
On Friday, one Euro was buying P9.48 and R9.85.

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