Junk status sends rand past R18 to the dollar – the weakest point on record
The downgrade of South Africa’s credit rating to junk by Moody’s saw the rand come under pressure as Asian markets opened, weakening to a new low of R18.03/dollar.
However, the early hours of Monday morning saw China’s central bank unexpectedly add some support by cutting interest rates by 20 basis points, assisting the rand in recovering some of its earlier losses, says Bianca Botes, treasury partner at Peregrine Treasury Solutions.
Botes added that more rand pain is expected as global markets open.
“The country’s deteriorating fiscal metrics and poor structural economic growth prospects were some of the main contributors to the downgrade,” said Botes.
“While the global currency market was closed, we will only see the reaction to the news once trading resumes on Monday. Although the rebalancing of the World Government Bond Index (WGBI) has been postponed to end April, a selloff in the region of $11 billion is expected.”
At R18.06 to the dollar late on Sunday night, this marks the weakest point for the rand on record – previously hit when the currency hit an intraday weakest level of R17.92, reached during a “flash crash” in Asian trading hours in January 2016.
The downgrade comes at a particularly bad time as South Africa and the rest of the world’s markets battle with the coronavirus pandemic.
Government noted the decision by Moody’s to downgrade South Africa’s long term foreign and local currency debt ratings a notch below investment grade.
“The decision by Moody’s could not have come at a worse time. South Africa, like many other countries, is seized with containing the outbreak of the coronavirus (Covid-19), said Treasury.
“The impact of Covid-19 is felt across various sectors of the economy including the financial markets which experienced a significant sell-off in equities, bonds and exchange rates as investors retreated to safe haven securities amid the uncertainty.
The uncertainty of the pandemic has caused investors to retreat to safe-haven securities to the detriment of risky asset classes including the rand, said Sanisha Packirisamy, economist at Momentum Investments.
“A more depreciated currency leads to a higher cost of imported goods which could raise inflation and limit the extent to which the South African Reserve Bank can react to the Covid-19 virus.”
However it’s not all bad news, and Packirisamy noted that the bulk of the South African equity market’s earnings now come from global markets, meaning any further near-term rand weakness should have a positive effect on the South African equity market.
At 07h20 on Monday (30 March), the rand was trading at the following levels against the major currencies:
- R17.95/dollar (+1.72%);
- R22.23/pound (+1.15%);
- R19.88/euro (+1.16%).
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