Rand starts the week under pressure – eyes R17 to the dollar
The rand started the week under pressure, edging closer to the R17 to the dollar mark after closing last week at its weakest point in 21 months.
The rand’s weakness isn’t necessarily being driven by local factors, analysts say, with most of the downturn reflecting stronger global currencies, while battling the fallout from global events.
However, local problems cannot be written off completely – persistent load shedding, reports of insecurity and potential social instability, and expectations that higher local inflation will push rates higher all factor in.
According to Citadel Global, the rand took a significant knock at the close of last week, trading around R16.80 – its lowest level since September 2020. On Monday morning, the currency started the week even weaker, trading around R16.95.
- Rand/Dollar: R16.95
- Rand/Pound: R20.28
- Rand/Euro: R17.16
This comes amid broad-based dollar strength due to the Fed’s firm hawkish stance and fears of a global recession, the group said.
“Additional pressure from load shedding, which is expected to weigh heavily on local economic growth, also dampened the mood. There is widespread concern that the current round of load shedding could have long-term effects on the country’s economic growth,” Citadel said.
“The currency was also pressured by the dollar strength. Meanwhile, South Africa’s higher-than-expected inflation data in June points to a further interest rate hike in July, which is expected to top the initial 25 basis point forecasts.”
Analysts at TreasuryOne concurred, adding that a positive note is that ratings agency Fitch affirmed Soth Africa’s BB- long-term foreign and local currency debt ratings while keeping a stable outlook.
The rand was also finding some support among commodities, with gold trading flat and platinum and palladium gaining.
Economists at the Bureau of Economic Research (BER) on Monday said that, while local woes certainly do not help the rand, recent weakness in the currency is largely driven by the stronger dollar/weaker euro dynamic.
“The rand weakened by another 2.3% week-on-week against the greenback, while it lost a similar magnitude against the UK pound – which found some, likely temporary, support in the wake of the resignation of prime minister Boris Johnson, the BER said.
“The dollar continues to benefit from US Fed tightening as well as concerns about the global growth outlook – even as the aggressive Fed is seen as one of the possible causes of the economic downturn.”
Forecasts
Professional services firm PwC has published its latest economic outlook for South Africa, including forecast scenarios for where the rand is heading in the remainder of 2022.
The rand’s weakness over the last few months has largely been driven by the global economic downturn from the Russia-Ukraine war and interest rates in the USA, PwC said, while local factors such as load shedding also factored in.
The group’s baseline scenario is that things in Ukraine do not escalate to involve NATO countries directly and that global markets find some sort of stability. The impact on the rand would be for it to average between R15.50 and R16.05 over the next 12 months.
The downside scenario – where more countries are pulled into the war and global markets destabilise – would see the local unit average R16.00 to R16.70, while the upside – where the conflict is significantly reduced – would see the rand average between R15.00 and R15.40, PwC said.
Read: The rand is being tested as fears of a US recession mount
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