Here’s why the rand is taking a beating right now

The rand has weakened almost 4% against the US dollar since the start of the week and is currently testing the 200-day moving average, says Matthew Axelrod, head of risk at DG Capital Forex.

If the local currency closes above R15.10/dollar it would be a bearish signal with the next resistance level at R15.25 and then R15.50, he said.

“We feel the market is pricing South African Reserve Bank rate hikes more or less fairly, but maybe being somewhat over-zealous on US Federal Reserve hike pricing.

“In the short term, the rand could continue to weaken to around R15.50 and then, if the Federal Reserve disappoints on 4 May, it could pull back to around R15.00.”

Axelrod noted that there are several reasons for the currency slipping this week:

• Stage 4 load shedding is one of them;
• The intense floods in KZN and the damage caused is another;
• The inflation print came in below expectations, implying less upward pressure on local interest rates; and
• The US dollar has also been strong as the market is pricing in quite a hawkish Federal Reserve in two weeks’ time.

“Load shedding has a negative effect on the rand as the economy cannot function efficiently without power. The higher the stage we need to enter, the more negative the effect will be. This week we have had to move to Stage 4, which sees a significant amount of power removed from the grid.”

“Although inflation printed right at the top end of the South African Reserve Bank (SARB) target band, it was slightly below expectation, while core inflation was still below the midpoint, which points to weak demand-side inflation pressure.

“These prints suggest that the SARB can continue gradually hiking rates, and that aggressive hikes aren’t necessary, which is rand negative, while the US Federal Reserve is currently relatively hawkish.”

At 14h10 the rand was trading at these levels against major currencies:

• R15.24/USD
• R16.59/EUR
• R19.86/GBP

Read: Interest rate hike and load shedding double-blow to hit South Africa