Embattled rand falls to Zuma levels
• Currency hit by fears of full US-China trade war • Domestic drivers add to weakness
For the rand, Ramaphoria is over. The currency slumped as much as 2% against the dollar on Tuesday to its weakest level in more than six months — when Jacob Zuma was still president.
It has unwound all the gains it made after Cyril Ramaphosa took over as ANC leader in December.
The rand, which peaked at R11.50 to the dollar earlier in 2018, has been hammered by speculation that US President Donald Trump will spark a fullon trade war with China, fuelling a slide in emerging market assets on concern the global economy will slow.
Domestic drivers include an economy that contracted more than 2% in the first quarter, lingering concerns about the financial viability of stateowned institutions — much of whose debt is backed by the government — infighting within the ANC and the debate about the expropriation of land without compensation.
The rand slumped to a worst level of R13.9168 to the dollar on Tuesday, before recovering slightly to R13.7556 shortly after 7pm. It ended Monday at R13.6458. It has fallen 11% against the dollar since the start of 2018 and is more than R2 off the best level achieved after Ramaphosa became the country’s president.
“Sentiment has soured somewhat after the markets’ initial positive reaction to the new ANC leadership,” said Ashley Dickinson, head of fixedincome dealing at Sasfin Wealth.
The rand’s drop may mean more pain for consumers, who have already been hit by petrol prices that have increased about 10% and a one percentage point increase in VAT in 2018, which was partly blamed for April retail sales growing at their slowest pace in 15 months.
Currency weakness may also push up inflation and prompt the Reserve Bank to raise interest rates, despite a shrinking economy and an unemployment rate near 30%.
“If we do think there is a risk of second-round effects, we will have to act,” Bank deputy governor Kuben Naidoo told Bloomberg TV in Portugal on Tuesday. If inflation rose or was forecast to rise, the Bank would
have to act, he said.
Banking shares on the JSE have suffered in the past few days as the rand has weakened, with the index having given up about 9% since last Thursday. Higher inflation and interest rates have in the past had a deleterious effect on bank shares as bad debt rises.
The rand weakened to R14.50 to the dollar on November 14 2017, ahead of the ANC’s elective conference in December, which saw Ramaphosa defeat Nkosazana DlaminiZuma to claim the presidency. Buoyed by optimism that Ramaphosa would quickly take action to boost the economy and eradicate corruption, the rand firmed to R11.5068 to the dollar on February 26, its strongest level since February 2015.
The rand has declined with other emerging market currencies as interest rate increases by the US Federal Reserve drove demand for dollar assets, prompting investors to demand a higher yield premium to hold emerging market assets, which are perceived to be riskier.
The rand might weaken to R14.30 in the short term, Nedbank dealer Mehul Daya said. “Normalising interest rates and rising political uncertainty from Turkey to Italy are contributing to the withdrawal of liquidity, resulting in an unwinding of the carry trade.”
The rand in the past benefited from carry trades, where investors borrow in a currency with low yields and invest the proceeds in one with higher returns. The unwinding of stimulus policies globally means developed market currencies are looking more attractive.
Stocks fell in the US, Europe and Asia after Trump threatened tariffs on another $200bn of Chinese goods and Beijing said it would retaliate. Chinese shares slumped on Tuesday, after reopening following a holiday.
“The rand had plunged deeper towards the down case as risk-off elevated on increased threat of trade war,” Investec chief economist Annabel Bishop said in a research note.
“The rand is likely to remain volatile for the rest of [the second and third quarters] as it remains at risk from heavy portfolio outflows,” Bishop wrote.
Government bonds also weakened on Tuesday, with the benchmark R186 yielding about 9.15%. At the start of Ramaphoria, this dropped to about 8%.