Rand holds above R17 against the dollar
The rand threatened a sustained break above R17 against the dollar on Monday as it continues to take its cue from global factors.
TreasuryOne said in a morning note on Monday that the local unit weakened to R17.04 on Friday before ending the week at R16.99 as it continued to be one of the worst performing EM currencies. It warned that a break through the R17.05 level would open up the 17.20 level, but this will be dependent on the dollar testing parity against the euro.
Bloomberg reported Friday that the rand’s weekly drop (4.9%) was its biggest since the five days ended April 22 and the fourth-worst performance among 23 developing nations monitored by the group.
It said that the rand faces a fresh challenge amid uncertainty about the fate of finance minister Enoch Godongwana, who’s battling allegations of sexual assault and may be forced to step down.
Should Godongwana be sidelined just two months ahead of a budget update, the rand would likely extend a decline sparked by concerns about Federal Reserve tightening that has boosted the dollar, said George Glynos, the managing director and chief economist at ETM Analytics.
“It would be received poorly” if the “well-respected” finance minister was pushed out, Glynos said. “The stakes are so high on this.”
While Godongwana has denied the allegations, he has said he’s prepared to step down if charges are brought against him. The South African police sent a docket on its investigation into the allegations to the National Prosecuting Authority, which will decide whether the minister should be prosecuted, Bloomberg said.
It said that traders might be underpricing the risk. “How much of the political premium is priced in, with all that is going on worldwide, is difficult to say,” said Cristian Maggio, the London-based head of portfolio strategy at TD Securities.
“External factors do weigh more than the purely domestic drivers in this context, but amid global uncertainties, you can expect the market to look more closely at the political idiosyncrasies — or perhaps just treat them as an additional risk factor that requires further asset price premia.”
The rand traded at the following levels against the major basket of currencies on Monday morning:
- Dollar/Rand: R17.05 (1.17%)
- Pound/Rand: R20.14 (0.15%)
- Euro/Rand: R17.09 (0.49%)
The risk aversion and demand for the dollar are still strongly evident in markets this morning, with the greenback holding at Friday’s stronger closing levels. Markets will be watching Jerome Powell’s opening speech at the Jackson Hole Economic symposium later this week for any changes to the Fed’s thinking on monetary policy, said Treasury One.
The symposium gives Fed chair Jerome Powell a platform to reset the market’s expectations for a pivot to slower rate hikes. The latter bets have helped to drive the recent equity rebound but are vulnerable to the possibility of persistently elevated price pressures even as economic growth stumbles, Bloomberg reported.
“It is likely central bankers, including Fed Chair Powell, will remain hawkish in dealing with inflation albeit with a bit of caution creeping in given the emerging economic downturn,” said Shane Oliver, head of investment strategy at AMP Services.
On Tuesday, Stats SA will publish the household employment data for 2022Q2, and Wednesday sees the release of the SA consumer inflation (CPI) data for July.
“We expect July’s figure to be the peak in the current cycle, with CPI rising by 1.4% mom to 7.7% year-on-year, after surging to 7.4% in June from a trough of 2% in May 2020,” said Nedbank in a note.
“July’s hefty petrol price hikes will account for the bulk of the acceleration. Petrol prices alone account for 4.82% of the inflation basket. This component of CPI is expected to have increased by 10.4% mom to a frightening 57.7% year-on-year, it said.
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