The rand and bonds are of extreme weakness, but still cheap

The rand and bonds are of extreme weakness, but still cheap

The local markets have rallied in the past two weeks. While any strength is unlikely to be linear, we still view the rand and nominal bonds as cheap. Monetary policy will be a key focus, driving especially bond markets in the next two weeks.

The rand is of “extreme” weakness but still oversold

The rand has recovered from what we viewed as “extreme” weakness when it traded close to 20,00 against the USD (see The wrong time to extrapolate weakness dated 31 May). We still view the rand as oversold despite the recovery over the past two weeks. From a risk-return perspective, we continue to favour a stronger rand.

Bonds, too, are of “extreme” weakness, but nominal bonds have more work to do

Nominal bond yields have moved lower across the curve while ILB yields have been steadier over the past two weeks. We still believe nominal bonds are cheap and ILBs are fair. This also implies that we expect South Africa’s breakeven inflation to move lower, too, in the coming months.

How would a more hawkish SARB change our bond view?

With the Federal Reserve’s (Fed’s) FOMC meeting this week and South Africa’s CPI print for May next week, the bond market will be focused on monetary policy. In this regard, when we look at our nominal bond fair-value curve, we are cognisant that there is a risk that our base case view on SARB is too dovish, and that SARB might end up hiking more than we expect.

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