Rand flirts with R20 to the dollar as pressure mounts
The rand continues to take a beating in financial markets, hitting yet another record low as external pressures collide with the government’s political missteps and the ongoing power crisis.
Starting June squarely on the back foot, the rand dropped to a new record low of R19.91 against the dollar in early trade on Thursday (1 June), after weeks under pressure due to a myriad of issues in May.
The rand’s latest woes started in the latter half of May when markets flew into a “raw panic” over murmurings of grid collapse in South Africa. While the government has tried its utmost to quell worries by insisting such an eventuality is highly improbable, investors are doubtful that the necessary plans are in place to mitigate such an outcome.
This position has been exacerbated by banking institutions and even the country’s central bank taking the necessary precautions to ensure systems are protected in the event of grid collapse.
Even with grid collapse unlikely, the ongoing power crisis – and lack of short-term solutions from the government – are keeping the South African economy stressed, bringing into question the country’s prospects for growth in the coming quarters and, indeed, the full year.
South Africa has also been hit and punished for its stance on the Russian invasion of Ukraine. In May, the US ambassador openly accused South Africa of arming Russia, which strained markets severely as the potential of secondary sanctions loomed large over the currency.
The government has since attempted to mend fences – with President Cyril Ramaphosa’s latest move being to send key ministers to vital trade nations to try and settle the waters over South Africa’s stance on the war – but business leaders, Western nations and markets appear unconvinced by his claims of neutrality.
The latest blow to hit the rand on Thursday comes from external factors. According to Citadel Global, poor data out of China is adding pressure to commodity-linked currencies, with even the Australian and New Zealand dollars slumping to six-month lows as a result.
TreasuryOne noted that China’s manufacturing PMI contracted to 48.8 versus market estimates of a rise of 51.4, pushing the dollar firmer as risk sentiment turned more negative.
“Congress is due to vote on whether to approve the debt ceiling agreement today, and the uncertainty is adding to the unease in markets,” it said.
The rand hit a new all-time worst level of R19.86 on Wednesday on the back of the stronger dollar, along with local political and power issues. It has now pushed past even that level.
“Load shedding is back at stage 6, while the government has granted diplomatic immunity to Russian officials attending the BRICs summit in August. The ICC has put out a statement saying South Africa must arrest President Putin,” TreasuryOne noted.
“The rand will remain on the back foot over the next few months with negative investor sentiment, driven by possible economic sanctions, unlikely to improve.”
Citadel noted that the dollar has softened on Thursday, given commentary from the Fed, but the rand is not enjoying the typical boost associated with that turn. The rand is struggling to find direction, the group said.
“The dollar has retreated from a two-week high against its major peers as the passing of the debt agreement in the US Congress eased some nerves. In addition, some Fed officials have suggested ‘skipping’ a rate hike in June.
“Markets are now pricing in an approximate 26% chance that the Fed will raise rates by 25bps this month, compared to a 67% chance just a day ago,” it said.
On the plus side for South Africa, the downturn in commodities is also affecting the global oil price, which is down to around $72 a barrel. This should translate to lower petrol prices next week.
Read: Rand hits a new low after BRICS summit immunity announcement
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