The rand was hammered in trade on Thursday (12 June), losing 3.6% against the dollar, and breaking above R17.00 yet again.
“The warnings that the recent risk-on rally is premature and unsustainable rang true this week as the market made a U-turn, starting on Wednesday evening following the Fed meeting.
“The change in risk appetite intensified on Thursday, sending risk assets ranging from equities to commodity-driven currencies tumbling across the board,” said Bianca Botes, executive director at Peregrine Treasury Solutions.
“It is mostly to do with the overall risk-off move (in global markets), but it’s combined also with the central bank’s intentions to have lower rates and have potentially negative real rates,” Peter Kisler, North Asset Management emerging market portfolio manager told Reuters.
The local unit had gained as much as 11% against the dollar from the start of May until Thursday’s collapse.
In morning trade on Friday, the rand traded at the following levels against the major currencies:
- Dollar/Rand: R17.13 (-0.26%)
- Pound/Rand: R21.53 (-0.54%)
- Euro/Rand: R19.35 (-0.29%)
The US Federal Reserve took centre stage on Wednesday, providing insight into interest rates, bond purchases and economic forecasts, said Peregrine Treasury Solutions in a weekly roundup note.
While markets largely anticipated that interest rates would remain unchanged and that a degree of bond purchases would continue throughout 2020, the central bank’s sombre tone gave markets a harsh reality check following three weeks of over-optimism, it said.
The economic outlook highlighted the economic devastation suffered across the US, with the economy expected to contract by 6.5% this year, and unemployment expected to settle at 9.3% by the end of the year.
“In contrast to the widespread belief that the globe will see a V-shaped recession and recovery, and false hopes over the amount of stimulus provided, markets are now coming to grips with the fact that the economic recovery may take much longer, as the Fed currently expects a recovery to take at least three years.
“The Fed’s reality check quickly shattered the superficial optimism that fuelled the recent risk rally, and by Thursday morning, we found ourselves back in a risk-off environment,” said Botes.
“The peripheral risks that were placed on the backburner during the rally (such as geopolitical tensions) are all drawing increasing focus again, as investors attempt to quantify how these risks will filter in to the economic narrative, and particularly whether political decisions ahead of the US election could prolong the climb towards a recovery,” she said.
For South Africa, the country had hoped to see further lockdown relaxations. However, there has been nothing but silence from the National Command Council (NCC) as it tries to navigate the way forward in light of recent legal challenges, leaving citizens uncertain as to what the coming months may hold, said Peregrine Treasury Solutions.
While business confidence has been on the decline for some time, this week saw it tumble to the worst levels seen since inception of the index, as many businesses face financial devastation after lockdown regulations forced them to halt operations, it said.
Gold production tumbled 59.6% year-on-year in April, total mining output plunged 47.3% year-on-year in April, and manufacturing production for March contracted 1.2% month-on-month.