Here’s where the rand could go as load shedding and the Wuhan coronavirus hit

The rand was on the back foot in early trade on Monday (3 February), after breaking the R15/dollar threshold for the first time in 2020 on Friday.

The South African currency came under pressure in January as demand was hurt by a weak growth outlook for the economy after the International Monetary Fund (IMF) and South African Reserve Bank downgraded their growth predictions.

The rand continued its slide last week, attributed to the selloff of emerging market assets as panic surrounding the spread of the Wuhan coronavirus continues to grip markets.

Bianca Botes, treasury partner at Peregrine Treasury Solutions, said that a number of emerging markets have come under pressure as investors try to calculate the economic impact of the virus, while the death toll continues to rise.

“The Chinese coronavirus is still the talk of the town, while we turn to local manufacturing PMI and vehicle sales today,” said Botes.

Rolling blackouts implemented by Eskom, and set to continue until Thursday (6 February), have also been a factor.

The IMF has issued stern warnings to government as the fiscal situation continues to deteriorate, fuelled by continued SOE bailouts, she said.

“We expect the rand to test a sustained break above R15.00,” said Botes.

Vulnerable rand

The recent sell-off is a reminder of the rand’s vulnerability to adverse shocks (local or international) as the country’s fiscal and growth concerns remain in place, said Nedbank analysts in an investor note on Friday (31 January).

“We maintain our target of R16/dollar around mid-year, particularly after the Fed held its course at its Federal Open Market Committee meeting, while the SARB turned more dovish, in our view, at its last MPC meeting.”

Turning back to fears around the coronavirus outbreak, Nedbank analysts believe the rand will recover some lost ground once equity markets are more comfortable with the potential risk of the pandemic.

This aligns with Absa’s views published in January, with the bank’s analysts predicting that the rand will likely to weaken back up to R15.16 against the dollar by the end of the first quarter and reach R16.13 by year-end.

Absa said that it expects the rand to be particularly vulnerable to capital outflows during the first half the year because it believes Moody’s is likely to downgrade South Africa’s local currency credit rating in March, which in turn will eject South African Government Bonds (SAGBs) from the World Government Bond Index.

An additional event, which hasn’t generated much attention, it said, is that JP Morgan is scheduled to further reduce South Africa’s bond weighting within its emerging market bond index during the first half of 2020.

“The rand could actually weaken by more than we expect if the SARB cuts policy rates by more than the market currently expects and/or the economy falls back into recession,” Absa said.

By comparison, Bank of America (BofA) are relatively bullish on the local currency and forecast that it will trade at R14.85 over the next 12 months.

At 07h30 on Monday, the rand was trading at the following levels against the major currencies:

  • Dollar/Rand: R14.96 (-0.41%)
  • Pound/Rand: R19.70 (-0.58%)
  • Euro/Rand: R16.58 (-0.37%)

Read: South Africa is on a path of wealth destruction – but there is a silver lining

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Here’s where the rand could go as load shedding and the Wuhan coronavirus hit