The rand clawed back some losses against the US dollar overnight, as the greenback came under some pressure following the release of data which showed a surge in Americans filing for unemployment benefits amid the spread of the coronavirus.
The number of Americans filing claims for unemployment benefits climbed to record of more than three million last week, while the US also overtook China for the most coronavirus cases globally – at 85,594 currently.
But, with South Africa in a three-week lockdown at a time when the economy is in a technical recession, a probable downgrade of its credit rating to “junk” on Friday could see the local unit climb back above R18.00 to the dollar, albeit for the short term.
“It’s D-Day for South Africa, as not only is it the first day of lockdown, but Moody’s is also scheduled to announce the result of its highly anticipated credit rating review that could see South Africa be downgraded to junk status,” said Bianca Botes, treasury partner at Peregrine Treasury Solutions.
“Meanwhile, the local unit is performing well against the greenback, as pressure on the dollar continues to boost the local currency. This is as a result of market hopes for more US monetary support on the back of the Fed’s pledge to apply unlimited stimulus in order to counter the impact of the virus on the US economy,” she said.
However, the rand is facing some pressure against the pound and euro, as both these currencies are also receiving the benefit of a softer dollar.
Bloomberg reported that the central bank’s announcement that it will purchase government bonds in the secondary market led the rand and South African debt to rally on Wednesday.
But the currency’s gains were all but wiped out on Thursday as investors turned their attention back to the government’s weak balance sheet, which the virus and a lockdown to combat it may worsen.
The rand could also take a hit next week if Moody’s Investors Service downgrades the country to junk on Friday, when it’s scheduled to release an assessment after local markets have closed, Bloomberg said.
That would lead to South Africa losing its last investment-grade rating and being excluded from the FTSE World Government Bond Indexes, which have about $3 trillion of funds tracking them.
“When Moody’s conducts its coming review, South Africa government’s debt dynamics will look much worse than it did a few weeks ago,” said Shahab Jalinoos, head of FX strategy at Credit Suisse, as cited by PoundSterlingLive.
A downgrade will lead to an initial spike in USD/ZAR perhaps taking USD/ZAR 3%-4% higher initially – above R18.00.
However, Jalinoos said that due to the exceptional circumstance thrown up by the coronavirus, Moody’s could decide to defer the rating decision until a later date.
Stellenbosch University’s Bureau of Economic Research (BER) noted that Moody’s is not obliged to provide a credit rating verdict on Friday.
“Given current circumstances, they may skip the decision. Some are making a moral argument about this, i.e. ‘how could they’ downgrade South Africa in these conditions,” the BER said.
“However, the cold hard facts of Covid-19 are that public debt stabilisation over the medium term in SA will be nigh impossible.
“We still think the decision is 50/50. Even if they downgrade, it may be a non-event as Covid-19 overshadows all else. Therefore, the additional domestic market sell-off on top of the carnage already experienced will hopefully be limited.”
South Africa has seen yet another substantial increase in confirmed coronavirus cases in the country, with the total now at 927 – up from 709 cases reported on Wednesday.
There have been no reported deaths, however the numbers are up 31% from last reporting – and addition of around 218 new infections.
Globally, there have been 532,926 reported cases, with 24,093 deaths.
The rand traded at the following levels against the major currencies:
- Dollar/Rand: R17.42 (0.63%)
- Pound/Rand: R21.32 (0.95%)
- Euro/Rand: R19.23 (0.73%)