Rand punches up – but remains on the back foot
The South African rand strengthened early Tuesday, reflecting a weaker dollar on global markets, before the release of the local business confidence index.
This followed the rand getting a boost on Monday after the dollar fell more than 1.3% on economic indicators in the US pointing to the Federal Reserve raising interest rates again in May.
Private sector sentiment in South Africa is expected to be released on Tuesday, illustrating the confidence businesses have in the current state of affairs.
According to Reuters, crippling power cuts by struggling state power utility Eskom was a major factor behind a drop in business confidence in January. Load shedding has not eased, however, and has only increased in severity and frequency.
On Wednesday (19 March), market focus will turn to the March consumer price index that could affect whether the South African Reserve Bank (SARB) would increase interest rates yet again.
Investec’s chief economist Annabel Bishop said that the rand reacted positively to dimming sentiment for US growth and its banking system.
Bishop said that, ultimately, markets are cautious as the full effect of rate hike cycles has not yet been felt.
The cautious tone among the international financial markets concerned about higher interest rates has had varying degrees of risk-off sentiment over the past twelve months, said Bishop.
This has driven varying degrees of risk-off sentiment. However, there has been a handful of positive results for the rand.
She added that the IMF warned that, in the context of the US:
“Below the surface, however, turbulence is building, and the situation is quite fragile, as the recent bout of banking instability reminded us the sharp policy tightening … is having serious side effects for the financial sector”.
“We are therefore entering a perilous phase during which economic growth remains low by historical standards, and financial risks have risen, yet inflation has not yet decisively turned the corner.”
“Financial institutions with excess leverage, credit risk or interest rate exposure, too much dependence on short-term funding, or located in jurisdictions with limited fiscal space could become the next target.”
“So could countries with weaker perceived fundamentals. A sharp tightening of global financial conditions—a ‘risk-off’ shock—could have a dramatic impact on credit conditions and public finances, especially in emerging market and developing economies”.
“With large capital outflows, a sudden increase in risk appetite, a dollar appreciation in a rush toward safety, and major declines in global activity amid lower confidence, household spending, and investment.”
“In such a severe downside scenario, global GDP per capita could come close to falling— an outcome whose probability we estimate at about 15%.”
Positive performance for the rand is not expected to last very long, and the currency remains highly volatile and subject to international risk appetite.
Late last month, Nedbank listed some of the most significant domestic driving factors of the rand beyond its inverted ties to the dollar:
- Fading growth prospects in the face of load shedding;
- Explosive revelations of former Eskom CEO Andre De Ruyter of government involvement in corruption;
- The greylisting by the Financial Action Task Force, which triggered significant capital outflows from the equity market;
- A disappointing set of Q4 2022 GDP numbers reflecting the impact of rolling blackouts;
- S&P Global’s downgrade of the country’s credit rating from positive to neutral;
- An underwhelming cabinet reshuffle from President Cyril Ramaphosa expanded an already bloated cabinet.
The rand is currently trading at:
- R18.18/$
- R19.95/€
- R22.61/£
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