The rand shot past R18 to the dollar on Thursday (2 April), as investors fled to safe haven assets amid the growing global coronavirus pandemic.
The US currency traded stronger against almost all global currencies as selling in global shares highlighted the growing risks from the pandemic. The rand tanked to its weakest point against the dollar ever, trading at R18.22 against it by 07h15.
“The dollar strengthened yet again yesterday, as renewed fears surrounding the performance of the global economy saw investors rush to safe havens,” said Bianca Botes, Executive Director at Peregrine Treasury Solutions.
“Having tested the level since Monday, this momentum to the downside finally pushed the ZAR well above the R18.00/$ mark. We continue to see exceptionally wide ranges, and the rand is expected to remain under pressure,” she said.
The rand lost some 13% against the dollar in March.
Investors were spooked by US president Donald Trump’s statement that a difficult few weeks lay ahead of the American citizens. The US has become the new epicentre of the Covid-19 pandemic, with over 215,000 cases reported so far.
The pandemic is showing no signs of slowing down, either, with total cases now at 936,000, as it quickly makes its way to the 1 million infections mark.
The dollar’s footing has had a negative impact on the rand, which has now shot way past the R18 to the dollar levels it has been testing since Monday.
In overnight trade on Monday, the rand touched over R18 to the dollar on the back of being downgraded to full junk status by ratings agency Moody’s, taking it to its weakest point on record.
However, as markets opened up, reaction to the news was not as harsh as many expected, and the rand quietly pulled back from these record-high levels. This time, we were not so lucky, as the realities of South Africa’s battered economy meet with the reality of the global pandemic head-on.
On Friday (27 March), ratings agency Moody’s pulled the trigger and downgraded South Africa’s sovereign local credit rating to one notch below investment grade, putting the country into ‘junk’, and leading the way for it to be pulled from the World Government Bond Index.
The downgrade was based on South Africa’s weak economic situation, where there is little to no growth, widespread electricity supply issues and a severe lack of policy movement to reverse any of the ills it faces.
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, saying that it “could not have come at a worse time”.
“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.”
Botes, meanwhile, said that IMF funding to help South Africa during the crisis is now looking like the most likely approach by government.
“IMF and World Bank funding is rapidly becoming a reality (for South Africa), as Finance Minister Tito Mboweni has met with other African finance ministers via video conference to discuss the potential of this approach in assisting Africa to fight the coronavirus crisis,” she said.
By 07h30, the rand was trading at these levels:
- Dollar/Rand: R18.20 (-0.16%)
- Pound/Rand: R22.59 (0.25%)
- Euro/Rand: R19.93 (-0.31%)