6 things that are hurting the rand right now
South Africa and other international markets were hit by the US Fed interest rate decision this week, despite a cut largely being expected.
While the interest rate cut of 25bps was already priced in, the subsequent testimony by the Federal Reserve Chair, Jerome Powell certainly wasn’t, says Bianca Botes, treasury partner at Peregrine Treasury Solutions.
“Anticipation of the Fed’s interest rate cut has been largely responsible for the recent strength witnessed in the currency, driving it to trade at overvalued levels for quite some time,” she said.
“This, however, came to a screeching halt on Wednesday evening (31 July), with the Fed making it clear that the 25bps drop is not the start of a rate-cutting cycle by the Fed, and action will only be taken as and when needed based on the economic data and activity.”
The rand rapidly lost ground as the news made its way to market, losing 1% in the overnight session, Botes said,
“The currency extended its losses on Thursday, making its way to the R14.50 mark. By Friday morning, it had swept through this key support level.”
Local factors
With the focus on the US, little attention has been paid to local events over the past week, with the release of the final report of the presidential advisory panel on land reform and agriculture on Sunday barely making its way to the financial market headlines, said Botes.
“The political landscape remains largely unchanged, while the Public Protector continues to suffer blows to her competency and credibility and calls for her removal grow louder,” she said.
“The commissions of inquiry into state capture and the PIC are ongoing and South Africa should probably brace itself for much more dirt to be aired before we can fully understand the extent of the state capture as well as identify all the various role players.”
Botes added that a number of underlying local fundamentals point to future rand weakness.
“The current picture for the local unit is not a pretty one, with many risks now coming to the fore as the shadow of the US interest rate cut vanishes, leaving the fundamentals bare for all to see.”
Some of the key risks weighing on the currency include:
- Potential downgrade of SA credit ratings, following the negative remarks by rating agency Moody’s, and the change in outlook by Fitch from stable to negative;
- Unemployment is at the highest level in 11 years, at a depressing 29%;
- SARS will likely not collect its budgeted revenue this year, adding additional strain to the fiscus;
- Eskom remains a cash drain on the government, with no end in sight for its financial turmoil;
- Economic growth remains subdued, now estimated at a lowly 0.6% for 2019;
- Ongoing global geopolitical tension between the US, China and other key trade partners.
Botes said that the rand is expected to remain under pressure, given the rally in the dollar on the back of a less dovish Fed.
“With the Fed announcement out of the way, we will see local fundamentals as well as economic data become more relevant once again in the pricing of currencies, and the picture locally remains a dismal one,” she said.
“Geopolitical factors will also once again make their way into the spotlight, and markets are sure to keep a close eye on President Trump’s Twitter account. After punching through the R14.50/$ mark, the rand will now test the R14.80 level.”
On Friday (2 August), the rand was trading at the following levels against the major currencies :
- R14.65/$,
- R16.22/€
- R17.73/£.
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