July 11, 2019 / 4:30 PM / a year ago

South African rand stronger with Fed seen cutting rates

JOHANNESBURG (Reuters) - South Africa’s rand strengthened on Thursday after the chairman of the Federal Reserve set the stage for a U.S. interest rate cut later this month, weakening the dollar and boosting risk appetite worldwide.

South African rand coins are seen in this photo illustration taken September 9, 2015. REUTERS/Mike Hutchings

Stocks enjoyed an early rally after positive retail data and comments from U.S. Federal Reserve Chairman Jerome Powell that cemented rate cut expectations, although this faded in the afternoon session.

At 1500 GMT, the rand traded at 13.9400 per dollar, up 0.3% from its previous close.

The yield on South Africa’s benchmark 2026 government bond dropped 7 basis points to 8.04%, reflecting higher bond prices.

Fed Chair Jerome Powell said on Wednesday the Fed would “act as appropriate” to ensure the world’s biggest economy will be able to sustain a decade-long expansion.

Lower interest rates in the United States typically lift demand for higher-yielding assets in emerging markets like South Africa.

But economists also expect the South African Reserve Bank to cut its main lending rate at a monetary policy meeting next week, a Reuters poll showed on Thursday.

Data on Thursday showed that South Africa’s manufacturing output grew only slightly in May, while the slump in mining continued, albeit more moderately, shifting attention back onto the central bank to stimulate growth.

“Given the potential for rate cuts in South Africa, the benefits the rand may gain from the lower trajectory in U.S. interest rates may not be as telling as at first glance,” Warrick Butler, a senior trader at Standard Bank, wrote to clients.

“There is still the backdrop of a possible (credit rating) downgrade in November to contend with, coupled with the continued malaise at (state power firm) Eskom,” he said.

The benchmark Johannesburg Stock Exchange Top-40 Index fell 0.59% to 51,188.17 points while the broader All-Share Index dropped 0.56% to 57,273.14 points.

Retailer Woolworths led the way higher in the morning after reporting 5.9% growth in sales over the year, boosting its shares by 7.86% and lifting local retailers by 2.61%.

The worst performers were miners Goldfields and energy company Sasol down 3.43% and 3.29% respectively.

Greg Davies, chief trader at Cratos Capital, said such companies were suffering due to the stronger rand against the U.S. dollar: “Obviously [the companies] are selling the resources for dollars and getting less rand for them,” he said.

Reporting by Alexander Winning and Naledi Mashishi; Editing by Kirsten Donovan

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