4 things that could drag down the rand even further

The South African rand slumped in trade on Thursday (6 June), breaking through several technical support levels including a big psychological mark of R15 against the dollar.

The currency’s decline follows a StatsSA report out on Tuesday which showed South Africa’s worst quarterly growth figure since the 2008 financial crisis, with Q1 2019 GDP contracting by 3.2%.

“Every ounce of ugly contained within the local political landscape was also exposed this week as the SARB mandate once again made headlines,” said Bianca Botes, treasury partner at Peregrine Treasury Solutions.

Also on Tuesday, ANC secretary-general Ace Magashule announced that the National Executive Committee (NEC) had made a decision to expand the mandate of the SARB to include economic growth and employment, in addition to the current inflation targeting approach.

He said that quantitative easing was a consideration to avail funds for development purposes.

The statement left financial markets reeling and once again brought the independence of the SARB into question, said Botes.

“But the turmoil did not end there, with the ANC’s economic transformation head, Enoch Godongwana and finance minister Tito Mboweni both contradicting the controversial statement, as the spat between top leadership of the governing party became public,” she said.

“At a time when the country is reeling from poor local economic performance, policy certainty and government stability become crucial fundamental elements to stimulate the economy and create desperately needed jobs.

“While many speculators have deemed Magashule’s utterances as an act of sabotage against the president’s efforts to restore investor and business confidence, the president himself remains eerily quiet on the matter.”

With the country’s economic growth wiped out, and sub-1% growth now the reality for 2019, the nation will turn its attention to the state of the nation address by president Ramaphosa, set to take place later this month, said Botes.

“However, it seems that the greatest battles the president is facing are being fought inside his own party and, regardless of policy promises, resistance from within the ANC ranks can be taken as a certainty,” she said.

“If anything has become clear, it is just how unstable the ruling party remains and that the remnants of the Zuma era continue to tarnish the envisaged ‘new dawn’ South Africans voted for on 8 May.”

Rand under pressure and it’s likely to continue

While all emerging markets remain under pressure, the rand is bearing the biggest brunt, underlining that the weakness over the past few days has been mostly driven by local politics, said Botes.

“With the rand frankly ignoring technical levels and purely focusing on the fundaments at play, it is safe to assume that the week ahead will be a hard one to anticipate as the market’s fate now lies at the feet of our politicians,” she said.

The rand has a weakening bias, but further downside risks would come from:

  • A downgrade by Moody’s;
  • Increased global trade tension;
  • The anticipated decrease in interest rates by the SARB;
  • Continuous policy uncertainty from local government.

The following elements could lead to the rand gaining some ground:

  • Expectations that the Fed will decrease interest rates;
  • President Ramaphosa addressing the SARB mandate issue head on and provide some clarity and certainty;
  • Decrease in global trade tensions.

On Friday morning the rand traded at the following levels against the major currencies:

  • Dollar/Rand: R15.05  (0.35%)
  • Pound/Rand: R19.11  (0.37%)
  • Euro/Rand: R16.96  (0.26%)

Read: Rand hits R15 to the dollar

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4 things that could drag down the rand even further