The rand led emerging-market currency declines last week, extending a slump to a six-month low as investors bet that the Reserve Bank would not follow developing-nation peers in raising interest rates.
However, it is tough to say exactly which factors led in this weakness, according to Andre Botha, senior currency dealer at TreasuryOne.
“It is hard to find the true nature of the rand weakness as the latest rand move can’t be solely attributed to the lousy GDP print that we saw last week,” he said.
“Looking at out EM (Emerging Market) peers we have seen them strengthening on the back of in the case of the Lira the Central Bank raising interest rates by 150 basis points and in the case of Brazil where the Central Bank stated that it would intervene after the real sank to its lowest level against the US dollar in nearly two years.”
Botha added that investors also did not run to safe havens such as gold – and the US dollar hardly moved on the back of the EM rout and in the case of the US dollar it weakened.
“The fact that EMs were so aggressively sold off in the latter part of last week could be that investors are merely positioning themselves for the week ahead, where we expect the Federal Open Market Committee (FOMC) to hike interest rates in the US.
“We have seen the euro rallying hard, and that is undoubtedly the market front-running the European Central Bank meeting this week where Mario Draghi is expected to announce their quantitate easing taper strategy,” he said.
This means that the market will look to two definite market-moving events this week – the US FOMC meeting and the ECB meeting, Botha said.
“Reaction to these two events will be paramount in the direction in the rand, as to indicate whether the rand weakness has some more legs or whether the move was overdone and we could see EMs clawing back some losses.”
The major currencies were trading at the following levels against the rand on Monday at 11h30 SAST:
- R13.14 to the dollar (-0.47%)
- R17.55 to the pound (+0.02%)
- R15.48 to the euro (-0.62%)