The rand is plummeting – here’s why

Following the Q3 GDP figures, and the initial positive sentiment that followed the G20 summit, reality has unfortunately set in for markets, with the rand topping R14.00 against the dollar again on Thursday (6 December).

“Investors realise that there is no formal agreement other than a gentlemen’s handshake between the US and China to put a hold on tariff increases as they take 90 days to renegotiate trade agreements. President Trump has also referred to himself as ‘tariff man’, adding fuel to the fire,” said Bianca Botes, corporate treasury manager at Peregrine Treasury Solutions.

So why does this matter? “Although it does not have a direct impact on trade between South Africa and other countries, except for the steel tariff we saw earlier this year, the impact of the tariffs will ultimately drive up prices of imported goods in the US, resulting in higher inflation and higher interest rates,” Botes said.

Since South Africa, along with other emerging markets, has high debt which is mostly foreign denominated, the ability to service this foreign debt diminishes as US interest rates rise, putting strain on an already severely strained local fiscus, the analyst said.

In addition, Botes said that there are a few local elements adding to the pain, although this contributes only about 20% to the state of the rand:

  • Load shedding and the potential effect on economic growth as we head in to 2019;
  • Parliamentary approval to amend Section 25 of the constitution;
  • Soft current account data released mid-morning Thursday – the Q3 current account deficit widened to R176.6 billion.

The rand has reacted very negatively, losing 1.4% against the dollar during trade on Thursday, and is once again above the R14.00/$ level. “We are yet to feel the effect of the opening of the US market,” Botes said.

The local unit traded at the following levels against the major currencies:

  • Dollar/Rand: R14.06  (1.58%)
  • Pound/Rand: R17.94  (1.96%)
  • Euro/Rand: R15.97  (1.80%)

Read: Rand among most-heavily traded currencies

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The rand is plummeting – here’s why