Rand’s fall sinks petrol price cut

Capital flight to dollar hurts emerging markets as US, China square up over trade

● Expectations of relief at the fuel pumps in September could be dashed if the rand continues to weaken along with other emergingmarket currencies that are bearing the brunt of geopolitical tensions and improvements in the US economy.

The rand slipped as much as 3.2% against the dollar to R14.15 and was down over 6% for the week on Friday.

The Turkish lira plunged almost 20% against the greenback for the week, Brazil’s real declined more than 3% and the Russian rouble weakened almost 5% over the past few days.

The slippage in emerging-market currencies follows an escalation this week in the tit-for-tat trade spat between the US and China. China retaliated with an extra 25% duty on $16bn (about R225bn) worth of US goods, including oil products, steel and cars.

This comes after the US added an extra 25% duty on $16bn of Chinese goods.

Russia was also in the firing line as US President Donald Trump firmed up his intention to impose sanctions on that country, which he holds responsible for a nerveagent attack on a former Russian double agent in the UK. Russia has denied this claim.

The Turkish lira slid due to concerns about the country’s economy and interference in the independence of its central bank.

Azar Jammine, chief economist at Econometrix, said the plunge in the lira was a “warning to SA of what could happen to the rand if the Reserve Bank were to abandon monetary discipline”.

He said the capital flight to the dollar, however, was unjustified given that the US was running a current account deficit of $465bn and the eurozone was running a current account surplus of $480bn. The dollar’s strength was likely to scupper Trump’s efforts to encourage a more competitive currency.

US inflation accelerated at its fastest pace in 10 years, data published on Friday showed. This puts the Federal Reserve on track to raise interest rates two more times this year, which could increase capital outflows from SA and other emerging markets as investors seek better returns.

The global problems and domestic facin tors, which include weak manufacturing data published on Tuesday, were among matters weighing on the rand and could dampen the outlook for fuel prices. Last month the price of fuel rose, with petrol now at a record high of R16.03 a litre.

Isaac Matshego, an economist at Nedbank, said that despite some stability in the price of oil at around $70 a barrel over the past two weeks, “with the rand at R13.10 we were definitely expecting a cut next month, but with this reversal, if it continues for the rest of the month, there will be no cut”.

Instead, there could be further increases fuel prices, which would feed through to inflation.

However, Nedbank maintained the view that the Reserve Bank would hold interest rates for as long as possible, possibly into the second half of next year. “[But] should we see the rand going to R14.20-R14.50, we will definitely be pencilling in an earlier increase,” he said.

On a trade-weighted basis, however, the rand weakened only 2% against its main trading partners, which was not yet highly inflationary. “If we break R14 and we hit R14.50 or R15, then the game changes and we do have to start thinking of maybe raising interest. If we stay below R14, I think we look at interest rates remaining where they are,” Jammine said.

Rand Merchant Bank economist Mpho Tsebe said the weakness in the rand was “probably overdone” but manufacturing data released this week was disappointing. From tomorrow, markets will watch mining and retail sales and if they point to a contraction in the quarter it would add pressure to the rand, she said.

Jammine said the rand was “at a kind of knife-edge”. Another concern was whether the economy had avoided a recession in the second quarter. He said the data might not be conclusive enough to tell.

“The big swing factor is going to be what the agricultural GDP does. That’s been moving wildly from one extreme to the other. It was +40% or so in the third and fourth quarter of last year and -24% in the first quarter of this year. If that shoots back up into positive territory, then we will avoid a recession. If we have another bad number for the second quarter, then we will have a recession.”

There could be further increases in fuel prices

Isaac Matshego

Nedbank economist