The rand strengthened on Wednesday morning (5 February) as it continues to be influenced by international news around the Wuhan coronavirus.
“News that a treatment for the coronavirus has been found made its way to the market this morning, restoring risk appetite and subsequently positive sentiment towards emerging markets,” said Bianca Botes, treasury partner at Peregrine Treasury Solutions.
“The rand is responding positively to the news.”
Despite this good news, a new Reuters poll shows that the rand and other emerging markets are at significant risk of weakening in February if the Wuhan coronavirus epidemic expands.
A basket of emerging market currencies has lost close to 1.5% since mid-January, when the asset class was first hit by fears about the contagion, dropping to its lowest in more than a month.
The rand, seen as ‘the whipping boy’ for global risk sentiment, already racked up losses last week when traders and investors flew to safer havens.
“The rand risks approaching, and exceeding, R16/dollar this quarter if South Africa looks increasingly likely to see a Moody’s downgrade, given that the domestic currency has already reached a low base on the back of the impact from the virus on risky assets,” said Annabel Bishop, chief economist at Investec in Johannesburg.
South Africa is due a credit review at the end of next month. Investors will automatically sell its bonds if Moody’s lowers its sovereign rating to junk.
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 late last week.
“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.
The rand was trading at the following levels against the major currencies at 12h45 on Wednesday:
- R14.71/dollar (-0.48%)
- R19.21/pound (-0.26%)
- R16.21/euro (-0.71%)