Rand in slump – and it could get worse

The rand continued to weaken against the dollar in morning trade on Friday (2 September) – but is not alone as the US currency has flexed against major adversaries in recent sessions after data showed a resilient local economy, providing more room for the Federal Reserve to aggressively hike interest rates to temper inflation.
The local currency has lost almost 16% against the dollar in the last five months from its peak of R14.46 against the dollar at the start of April, Reuters reported.
Market focus will be on the US employment and payroll numbers due out later on Friday after yesterday’s ISM manufacturing PMI surprised to the upside and boosted the dollar, TreasuryOne said in a note.
The jobs update is expected to show healthy payroll growth and follows a stronger-than-expected US manufacturing report, Bloomberg reported. Traders increasingly anticipate another large 75 basis points Fed rate rise to cool inflation, it said.
The payrolls report is projected to show a 298,000 gain and solid wage growth. Federal Reserve Bank of Atlanta President Raphael Bostic said there’s still some work to do to contain price pressures.
The rand briefly broke above the R17.30 mark yesterday as the dollar firmed before closing at R17.27, down 1.0% on the day, said TreasuryOne.
“The local currency is currently relatively flat at R17.28 in cautious trade as we await the payrolls number. The rand weakness is a bit overdone up here, but a good payrolls number could still see the dollar firm further, and the rand weaken,” it said.
Markets are currently priced for a third consecutive 75 basis point interest rate hike in September, said Citadel global director, Bianca Botes.
The Euro managed to claw its way back above parity, trading just above $1, as investors weigh growth concerns and prospects that the European Central Bank (ECB) will continue to raise interest rates.
Recent data showed the inflation rate in the euro area increased more than expected this month, raising the odds the ECB will also deliver a 75 basis point rate hike when it meets next week.
However, several ECB members have recently advocated for a larger hike. Concerns of an imminent recession in Europe continue to build as the energy crisis intensifies, weighing down on the common currency.
The British pound remained on the back foot, weakening past $1.18, and reaching its lowest level since March 2020, as the outlook of soaring inflation threatened to hurt the pound’s purchasing power and further hurt the British economy, said Citadel.
Citi Bank economists forecasted inflation will surge to 18.6% by the start of 2023, due to soaring wholesale gas prices, supported by expectations that the country’s retail energy price cap could reach £5,816 by April, compared to £1,971 currently, said Botes.
The South African rand was caught in the crossfire of a strengthening dollar, to trade at R17.00/$ on Thursday, nearing lows last seen on 20 July, as Fed Chair, Jerome Powell, suggested that the US Central Bank will keep raising interest rates to tame inflation, bolstering the greenback.
The rand has consistently declined by more than its purchasing power parity equivalent rate against leading currencies over the years, noted economist, professor Brian Kantor of Investec Wealth & Investment. Strong action is needed to change this, he said.
The exchange value of the rand with the US dollar or sterling has been weaker than its purchasing power parity (PPP) equivalent rate of exchange ever since 1995, when SA’s capital market was opened up, though with varying degrees of weakness.
“Had the rand simply followed the ratio of the SA consumer price index (CPI) to the US CPI since 1995, a dollar would now cost a mere R8. Similarly, since 1995 the difference between SA and UK inflation has been an average of 3.3% a year, while the pound on average has cost an average of 8.2% extra a year in rands since 1995.
“Yet not only has the rand depreciated by more than the differences in inflation over the past 27 years, it is also expected to carry on weakening by more than the expected differences in inflation. The rand is expected to lose its dollar value by an average rate of 7.6% a year over the next 10 years and at an average 6% rate a year over the next five years,” said Kantor.
The economist said that the task for South Africa lies in promoting capex – and so economic growth – by improving the outlook for the rand. It could do so by adopting policies that would make SA a superior emerging market, attracting a much lower risk premium.
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