Rand dives against the dollar

• Analysts warn of SA’s vulnerability to further global financial shocks amid tighter US monetary policy

Renewed concern has been voiced about SA’s ability to withstand further global financial shocks resulting from the tightening of US monetary policy.

The rand plunged more than 2% to the greenback on Thursday, despite a stronger euro, hitting R12.9868 in volatile trade before recovering marginally. In contrast, the lira firmed more than 1% after the Turkish central bank hiked interest rates.

SA, along with Turkey and Argentina, have been highlighted as countries that are extremely vulnerable to an expected shortage of dollars in global forex markets, amid the US Federal Reserve’s planned balance-sheet reduction.

The Fed is paring its purchase of US treasuries, which will lead to reduced dollars on offer to emerging markets.

This purchasing, known as quantitative easing and which has been in place since the financial crisis of 2008, is coinciding with the Fed’s policy to increase rates gradually, and coincides with US President Donald Trump’s fiscal expansionary and lower tax policies.

Capital Economics analysts say the likely effect will be limited availability of dollar funding for emerging markets. The expansion of the US budget deficit will worsen the problem.

“A stronger dollar tends to expose weak balance sheets, and this time will be no different,” say Nedbank traders Neels Heyneke and Mehul Daya.

They say the “tide of liquidity” that has supported global growth and financial markets has peaked and is contributing to the global dollar shortage.

A reduction in global dollars will in all likelihood drive the greenback firmer and weaken emerging-market currencies.

Already the rand has lost 4.7% against the dollar in 2018, while the dollar has gained 1.5% to the euro.

Analysts have emphasised other factors are also at play, such as the extent of borrowing requirements and fiscal and monetary policies.

The external financial requirements of emerging markets are generally lower than in previous tightening cycles.

But SA, with its twin fiscal and current account deficits, appears particularly vulnerable. Greater risk-off sentiment is expected, with the country’s local markets in May experiencing the largest outflow on record — a net R50bn.

Capital Economics says other emerging markets may be better prepared for further shocks. “Aggregate inflows to emerging markets have actually increased since the Fed started unwinding its easing in October last year.”

As a result, the benchmark US 10-year bond yield increased to 3.12% in May, its highest in seven years. The US Treasury plans to sell an extra $1.3-trillion of debt in 2018 to fund the expected tax shortfall and a higher budget deficit.

On Thursday yields on the 10-year hovered just below 3% again after less hawkish comments from Fed officials in May drove it back to 2.9%.