SA currency has nowhere to hide
• R20/$ looms after Fitch implies next move is down
The rand, one of the most volatile major currencies, was getting a beating that had traders eyeing R20/$ even before Fitch delivered the latest blow to SA. Traders are braced for more volatility in the coming week. “It is pretty stretched right now and could be a lot more stretched, and there is nothing to prevent it from getting to R20/$,” Anchor Capital chief investment officer Nolan Wapenaar said.
The rand, one of the most volatile major currencies, was getting a beating that had traders eyeing R20/$ even before Fitch delivered the latest blow to SA. Traders are braced for more volatility in the coming week.
“It is pretty stretched right now and could be a lot more stretched, and there is nothing to prevent it from getting to R20/$,” Anchor Capital chief investment officer Nolan Wapenaar said before Fitch announced SA’s latest downgrade. “As long as we are locked up in our houses and for as long as the US is in recession, it’s going to be difficult for the rand to recover.”
SA’s currency, which tends to move disproportionately during times of turmoil because of its relatively high liquidity, had been trading at new lows the whole week. It surged through R19/$ for the first time as Fitch said on Friday it had downgraded the country to BB from BB+, placing it two notches below noninvestment grade.
While not as devastating as the Moody’s Investors Service action a week before, which placed SA in junk with all three major ratings companies, it is nevertheless another kick that will further increase the country’s difficulty in raising funds in markets.
As borrowing costs rise, the government has fewer resources to fund key services and provide the stimulus needed to provide relief from the coronavirus-induced economic trauma that Fitch said will see the economy contract by 3.8% in 2020.
The local currency dropped about 8% last week, pulled down by reports showing the US recorded its largest job losses since the financial crisis, while surveys across Europe showed record declines in services. The rand’s losses for the week culminated in its longest losing streak since 2006. It’s down about 27% so far in 2020.
Bonds which got some relief from the Reserve Bank stepping in to increase liquidity after bond yields surged to record highs, saw these drop again on Friday. The yield on the R2030, which peaked at 11.62% on March 24, rose 22.5 basis points to 11.39%, according to Infront data. Bond yields move inversely to their prices.
“R20/$ becomes a very distinct possibility in the wake of global risk aversion and domestic economic woes, which are exacerbated by the very necessary lockdown currently under way," said IG senior market analyst Shaun Murison. "For recovery in the global market place we are going to have to see some evidence that key economies are starting to turn the corner and get ahead of the Covid-19 outbreak.”
Fitch maintained SA’s outlook as negative, implying that the next move is likely to be another drop further into junk, as it expressed scepticism that the government would be able to achieve the savings that
THE GOVERNMENT’S PROJECTIONS HAVE SINCE BEEN MADE EVEN MORE UNREALISTIC BY THE CORONAVIRUS OUTBREAK
underpin the numbers in its February budget. The government’s projections have since been made even more unrealistic by the coronavirus outbreak, which has seen President Cyril Ramaphosa order a three-week lockdown.
Fitch said it sees the consolidated fiscal deficit soaring to 11.5% of GDP in 2020/2021, which is more than the 8.5% predicted by Moody’s last week.
Government debt, including that owed by municipalities, as a proportion of GDP will jump to 80.2% in 2021/2022, above the 46.5% median for similarly rated countries, Fitch said.
“The ongoing sell-off brought on by the failure in confidence on the back of the Covid-19 fallout leaves countries such as SA, with poor fiscal metrics, with nowhere to hide,” said Bianca Botes, executive director at Peregrine Treasury Solutions.