Rand under pressure amid fears of coronavirus pandemic

The rand came under renewed pressure in trade on Monday amid fears that the Covid-19 virus could spread into new territories with South Korea being placed on its highest alert for infectious diseases as the viral outbreak infected more than 600 people there.

“A sharp rise in the spread of the Covid-19 virus in South Korea, Iran and Italy is causing renewed market jitters, pushing safe-haven asset gold to a fresh seven-year high in the early hours of Monday,” said Bianca Botes, treasury partner at Peregrine Treasury Solutions.

As the  virus spreads more widely outside China, raising the threat of a global pandemic, finance chiefs and central bankers from the world’s largest economies said they see downside risks to the world economy persisting, Bloomberg reported.

“South Korea, the hardest-hit country after China, had earlier raised its infectious-disease alert to the highest level after a 20-fold increase in cases. The situation in Europe was also escalating, with Austria halting a train from Italy on concern there were two infected passengers on board.

“Italy – now the virus’s epicenter on the continent – cancelled the Venice Carnival and other events amid a rising case load,” Bloomberg said.

Gold soared toward $1,700 an ounce, a fresh 7-year high, amid a global flight to haven assets.

Budget speech

On the local front, Botes noted that with budget week finally here, the country braces to see what finance minister Tito Mboweni has in store on Wednesday.

The rand could rally slightly on news of a positive budget, but will also have to contend with international factors including continued fears around the Covid-19 coronavirus, said Nedbank economist Walter De Wet in a research note.

As we head into the latter part of February the risk to the local currency is rising, he said.

“While locally, the 2020 Budget is a key event, we are less concerned about its impact on the currency than that of international events,” the economist said.

“While it is clear from monthly budget data published during the 2019/20 fiscal year that tax revenue has fallen well short of government targets and that the country’s fiscal situation remains under considerable pressure, we believe this view is largely factored into the currency already.”

Looking at the performance of the trade-weighted rand over the past 10 years, the currency tends to end February stronger than where it was at the start of the month, said De Wet.

Nedbank ascribes this price action to a budget that, in most cases, is in line with expectations as a result of which the currency experiences a relief rally.

Rand concerns

Despite the possibility of a relief rally at the end of February, De Wet said that there are two external factors which will likely impact its resilience.

Both these factors relate to slowing global growth that is weighing on trade and play either towards a weaker rand or a stronger dollar, he said.

“The first concern remains a potential negative trade shock with China, which, in our view, is becoming a greater possibility as the free flow of goods and services to and from the country is being inhibited because of the coronavirus outbreak.

“The impact of this shock seems to have spilled over into global bond markets this week and, as a result, the US yield curve is again flirting with inversion as growth concerns mount.”

Nedbank said that the rand could weaken by around 2% relative to its baseline forecast, reinforcing the view that the bias lies towards a weaker rand in the coming months. “Our target of R16.00 against the USD remains in place,” it said.

De Wet said that the second concern is slower growth and global trade (assisted by the coronavirus outbreak), which could lead to a stronger greenback.

“USD strength is an indication that dollars are disappearing from the financial system as, for example, US imports contracted in 2019; therefore, fewer USDs were exported,” said De Wet.

“The coronavirus outbreak is further slowing global growth and USD creation. This too talks to a weaker rand, at least against the USD, and further supports our view for a currency that is set to move towards R16.00 against the greenback,” he said.

The rand traded at the following levels against the major currencies in mid-morning trade on Monday (24 February):

  • Dollar/Rand: R15.15 (0.97%)
  • Pound/Rand: R19.59 (0.73%)
  • Euro/Rand: R16.39 (0.66%)

Read: South Africans are looking to break their tax-link ahead of controversial changes for expats

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Rand under pressure amid fears of coronavirus pandemic