The rand has started the new week on slightly stronger footing, pulling back below R19 to the dollar, up 2%, after reaching the weakest point on record, at R19.34 in early trade on Monday.
By 16h00, the rand had strengthened to R18.78 against the dollar, while trading slightly stronger against the euro and pound at R20.27 and R23.09, respectively.
The local currency has lost almost 40% of its value against the dollar since the start of the year, knocked by persistent economic issues (such as load shedding, which hit earlier in the year) and more recently the global coronavirus pandemic.
However, it was back-to-back downgrades from ratings agencies in the last week – pushing the country into full junk status – that sent the currency over the edge.
The local unit surrendered 3% to the dollar on Friday, hitting an all time worst level against the greenback, and breaching R19, after Fitch downgraded the country’s credit rating.
The ratings agency downgraded South Africa’s long term foreign currency debt from BB+ to BB with a negative outlook, citing a “lack of a clear path towards government debt stabilisation” while also noting the impact of the Covid-19 on growth.
According to the Buerau for Economic Research (BER), while trading at record levels against the dollar, the currency is following a known pattern, which gives an indication of where it could head to next.
Historically, in times of high volatility, the rand has weakened significantly, before the market re-balances.
“It is a reminder that while the current weakening trend is reaching extreme levels, we have seen this before,” BER said.
Plotting the rand’s journey over the last few decades, the BER noted that the currency has followed a familiar path: in the 2001, terrorist attacks, and IT-crash; during the global financial crisis; and even the 2015 ‘Nenegate’.
“The key takeaway from these previous experiences is that, whereas it is hard to call the top, the rand does tend to strengthen again from extreme undervalued levels. We expect the same to happen this time around,” it said.
“Part of the current selling pressure has to do with the global panic around Covid-19. Once that subsides and the global economy starts to recover (let’s say from 2020Q3/Q4), the rand should perform better.”
In the previous episodes, it typically took roughly three to five quarters for the currency to regain the levels that prevailed in the quarter before the big blowout, the BER noted.
“Based on this simple historical experience, the rand could be back at the 2020Q1 quarterly average (around R15.40/$) by the third quarter of 2021.”
However, there is an important caveat to consider, it said.
“Even if the global risk premium diminishes post the peak of Covid-19, the rand recovery may be delayed this time because the SA-specific risk premium is set to remain large amid a much worse credit rating profile.
“Still, on a 12-month view, we would expect the rand to be trading at notably stronger levels,” the group said.