With South Africans learning to live with the current cycle of stage 6 load shedding, many believe the ongoing power cuts to be the antagonist behind the weak rand. However, treasury experts say the power outages are only a small contributor to a far greater picture.
Reuters reported that the rand hit a 20-month low in trade on Tuesday touching R16.60 against the dollar amid fears of a looming global recession. And on Wednesday, the local unit continued to soften against the greenback.
“The rand has retraced all of its strong first-quarter advance, and then some, and is trading at levels last seen in the fourth quarter of 2020 when uncertainty around the Covid-19 pandemic was directing financial flows,” ETM Analytics said in a research note. “The dollar remains king,” it said.
“Yesterday (Tuesday) saw a rush into the safety of the dollar as heightened recession concerns panicked investors across all markets,” said TreasuryONE in a brief note. “The local currency is getting into the oversold territory but is at the mercy of the moves in international markets,” it said.
Locally, it noted that Eskom workers have accepted the latest wage offer, “hopefully easing the local power crisis”. Eskom signed a pay deal with South Africa’s National Union of Mineworkers, the National Union of Metalworkers of South Africa and Solidarity for a 7% wage increase, the utility said. The nation’s consumer inflation rate was 6.5% in May, Bloomberg reported.
“We need to wait for the US nonfarm payroll data on Friday and see if the USD continues on its merry run. As they say, the trend is your friend, but after 8 days of trading in the same direction, perhaps a bit of a relief rally could be on the cards in the short term,” said Andre Botha, senior dealer at TreasuryONE.
In afternoon trade on Wednesday (6 July), the rand traded at the following levels against the major currencies:
- Dollar/Rand: R16.78 (2.71%)
- Pound/Rand:R19.93 (0.76%)
- Euro/Rand: R17.06 (0.15%)
Bianca Botes, director at Citadel Global, said that although load shedding negatively affects economic growth and sentiment, the weak performance of the rand stems from numerous factors. Eskom simply switching the lights back on will not result in a significant rebound, she warned.
Botes pointed to four contributing factors to the current weakness in the rand.
- Global environment
The global environment is the key contributor to the weak rand, which is affected by geopolitical events such as the Russia-Ukraine war, as well as international inflation and interest rate hikes, the financial expert said.
“Central banks around the world are looking to rein in inflation to prevent the significant economic damage that comes with long-term higher levels of inflation. This is why interest rates are watched so closely.”
- Risk of recession
Botes said that aking a lesson from history, one can conclude that a recession is almost always preceded by a period of tightening monetary policy – rising interest rates, for example – and fiscal contraction – less government spending, higher taxes, or both – and often higher energy prices.
“The increasing risk of a recession is dampening appetite for risk assets, such as the rand and other emerging market currencies, and assets denominated in these currencies,” said Botes.
- Investors look to safe havens
During times of low sentiment, high risk and economic uncertainty, investors are flocking to ‘safe haven’ assets, said Citadel. Gold, which is usually considered to be a ‘safe haven’ asset, is not as attractive to investors due to the surge in interest rates and high yields offered by United States (US) treasuries.
- Flocking to the dollar
The dollar has surged to 20 year high against the euro and is now investor’s ‘safe haven’ asset of choice. Emerging market currencies, including the rand, will therefore feel the pinch of the rising dollar: the stronger the dollar, the more rands are required to buy a dollar, said Botes.