South Africa’s R19 ‘summer holiday’ beating

 ·14 Aug 2023

The rand has swung wildly over the last month, shifting from a move towards R17 to the dollar and trailing all the way back to over R19 to the dollar.

According to Investec chief economist Annabel Bishop, the rand’s movements can be partly explained by the ‘summer holiday’ effect – where the northern hemisphere summer vacation month sees many market players on holiday, with risk-taking typically dulled and negative events having a greater impact.

“Markets consequently tend to be risk averse in this period, which can run from May to September, with both perceived positive and negative market moving events having an exacerbated effect on financial market indicators,” she said.

This causes increased volatility as market reactions to events tend to be more pronounced.

For the rand, concerns over the global economic outlook, and especially from a small open commodity exporting country such as South Africa, has subsequently had a much deeper negative impact on the local unit – as does higher levels of risk aversion in global financial markets, Bishop said.

“The S&P Global Investment Manager Index for August highlights heightened risk aversion, with increased bearishness recorded across both risk appetite and expected return gauges.

“The expected equity market performance gauge has declined to the lowest level since May, reflecting a heightening of bearish sentiment. Despite more muted concerns about a US recession, US equity investors are still seeing prices being elevated,” she said.

This follows a more optimistic period for investor sentiment in the last third of July, which markets likely overshot, leading to some correction in August.

Currently, the rand is trading at R19.07 to the dollar – far above the R17.85 recorded on 31 July 2023.

However, fundamental market concerns also run deeper, particularly over global growth concerns due to China’s structural economic problems, Bishop said.

“Worries over China’s economy are also fueling risk aversion in markets. The country’s Politburo has referred to the economic recovery as ‘tortuous’, with weak economic data persisting.

“Falling consumer prices on weak domestic demand highlight the risk of deflation, along with lacklustre imports and poor export performance. Investors will be watching closely to see how these factors continue to impact financial markets in the coming weeks.”

Bishop’s comments echo other economic commentary on Monday, where the Bureau for Economic Research and economists at Nedbank pointed to the negative sentiment in global markets.

The BER noted that the rand lost between 2% and 2.5% against major currencies last week. Mid-week, the currency touched R19/$ for the first time in over two months – a position carried into the new week.

Economists at Nedbank noted that the rand’s weakness mainly reflects the impact of a stronger US dollar, which continues to drift higher; however, local factors are also at play.

“While the US dollar has been generally softer since the start of this year, with investors anticipating the end of the US rate hiking cycle as inflation eases, some uncertainties surrounding the peak in US policy rates and growing hopes of a soft-landing in the US economy appear to be supporting the greenback in recent weeks,” it said.

Domestically, the violent and disruptive taxi strike in Cape Town hurt sentiment, while the country’s disappearing trade surplus added further to the downside.

“Money market rates and bond yields were a touch lower. The JSE all-share index was flat as lower industrials eroded the gain by financials,” it said.

The baseline expectation is for the rand to persist somewhere between R17.60 and above by year-end.

However, according to Bishop, the risks to the rand remain squarely on the downside, with the currency more likely (43% chance) to head towards the R20.50 to the dollar point by the end of the year than to recover (1% chance) to under R17 by the end of the year.

Read: Double blow for petrol prices in South Africa

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