Rand targets R15 to the dollar as global trade war tensions rise
The rand is breaking through resistance levels with ease, as it targets R15 to the dollar on the back of global trade war tensions.
The currency hit a seven week low in early trade on Monday (5 August), trading at R14.92 to the dollar, having broken through the R14.80 resistance level.
Bianca Botes, treasury partner at Peregrine Treasury Solutions, said that the trade war between the US and China remains the focus point for the time being, adding that there appears to be no end in sight for the rand’s weakness as a result.
There is little resistance between the rand’s current levels and the R15.00 mark, Botes said.
US President Donald Trump made a decision to slap 10% tariffs on the remaining $300 billion of Chinese imports, a move that ended a month-long trade truce. China on Friday threatened to retaliate.
The rand had rallied at the back end of July, on hopes that the US Federal Reserve would enter into a rate cutting cycle.
However, while the Fed cut interest rates for the first time in more than a decade – by 25 basis points – it stressed that any further action will only be taken as and when needed based on the economic data and activity.
Petrol price hikes
The weakening rand will continue to have a negative impact on local prices, including fuel, which will keep households under pressure.
The Department of Energy announced this past weekend that the price of petrol will go up by 11 cents per litre for both grades of petrol on Wednesday (7 August), while diesel drivers will get some relief, with prices dropping by around 13 cents per litre.
Given the weakening rand, and rising cost of oil as a result of conflict in the Gulf region as Iran seized yet another oil tanker, consumers can expect fuel prices to increase further in September.
“With unemployment spiking at 29% and Eskom showing a record loss of R20.7-billion as well as spiralling government debt, the economic outlook is getting increasingly bleak,” said economist Dawie Roodt.
“It seems likely to me given our economic situation that that ratings agency Moody’s will downgrade South Africa’s sovereign debt to sub-investment grade later in the year. It has expressed concern over the vast sums of money needed to bail out state owned entities and the lack of growth in the economy,” Roodt said.
Credit rating at risk
While South Africa is currently in its longest economic downturn in history, exacerbated by fractious politics, which are hampering the pace for reform, the macro research team at Momentum Investments say a junk rating from Moody’s may not be on the cards for now.
Fitch recently revised the outlook on the country’s sovereign rating to negative to reflect weakening trend growth and rising fiscal and debt pressures, but Momentum said that Moody’s methodology does not warrant a junk rating for South Africa just yet.
However, it warned that the risks are rising, “and we could see the country losing its stable outlook later in the year”.
There is little sign of demand-pull inflation pressure, providing space for an additional rate cut, but reforms are ultimately needed to drive growth higher, the economists said.
The GDP forecast for 2019, is 0.6%, with inflation at 4.5%. That figure is expected to rise to 1.3% in 2020, with inflation at 4.7%.
The economy is likely to muddle along at moribund levels, and will remain reliant on positive global factors to provide interim growth boosts, it said.
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