Rand re­cov­ery brief as global gloom re­turns

SA cur­rency falls as much as 1.99% to a near 11-month low against the dol­lar on Wed­nes­day

Business Day - - FRONT PAGE - Karl Ger­net­zky Markets Writer

The rand’s re­cov­ery proved to be a false dawn as poor eco­nomic data glob­ally sparked a sell-off of riskier as­sets.

A day af­ter post­ing its big­gest gain in two months on Tues­day, the cur­rency, which of­ten acts as a proxy for global sen­ti­ment due to SA’s liq­uid and open markets, led de­clines among emerg­ing markets, fall­ing as much as 1.99% to a near 11-month low against the dol­lar.

SA stocks were not spared, with the JSE’s all share in­dex los­ing 2.11% on Wed­nes­day, cut­ting its 2019 gains to just 2.45%.

Gov­ern­ment bonds weak­ened as well, with 10-year yields ris­ing to the high­est level in nearly two months.

Bond prices move in­versely to bond yields.

The gloomy eco­nomic out­look caused in­vestors to opt for the safety of US trea­suries, said Per Ham­mar­lund, chief emerg­ing-markets strate­gist at SEB in Stock­holm. The rand was the most volatile of 24 emerg­ing-mar­ket currencies tracked by Bloomberg on a one­week ba­sis, which does not au­gur well for SA con­sumers.

Wild swings in the rand may prompt the SA Re­serve Bank, which has of­ten cited a volatile cur­rency among the big­gest risks to its in­fla­tion out­look, to re­frain from cut­ting in­ter­est rates fur­ther, even if other ma­jor cen­tral banks loosen pol­icy in re­sponse to the dark­en­ing eco­nomic out­look.

Data on Wed­nes­day showed that growth in China’s industrial out­put fell to a 17-year low in July, while eu­ro­zone industrial pro­duc­tion con­tracted the most in more than three years in June. Ger­many’s econ­omy shrank in the sec­ond quar­ter, fu­elling con­cern that Europe’s largest econ­omy is head­ing for a re­ces­sion.

“We are get­ting into an­other

pe­riod of syn­chro­nised de­te­ri­o­ra­tion” in the global econ­omy, said Chris­tian Mag­gio, chief emerg­ing-mar­ket strate­gist at TD Se­cu­ri­ties.

Higher-yield­ing currencies, such as the rand, were un­der par­tic­u­lar strain, he said.

Even be­fore the lat­est global gloom, lo­cal fac­tors were not favourable for the rand, with Pres­i­dent Cyril Ramaphosa’s on­go­ing le­gal bat­tle with pub­lic pro­tec­tor Bu­sisiwe Mkhwe­bane hit­ting sen­ti­ment.

The spat has fu­elled ner­vous­ness about Ramaphosa ’ s hold over a di­vided ANC, which may con­strain his abil­ity to pur­sue poli­cies needed to grow the econ­omy and avert a rat­ings down­grade.

Ramaphosa won the ANC pres­i­dency in De­cem­ber 2017, paving the way for him to be­come head of state two months later, on prom­ises to fix the econ­omy and root out cor­rup­tion.

The op­ti­mism that greeted his el­e­va­tion to head of state in early 2018 has all but dis­ap­peared as Ramaphosa faced a con­certed fight­back by his op­po­nents in the ANC, dis­tract­ing him from pur­su­ing his re­form agenda.

Sen­ti­ment was also dented by the de­te­ri­o­ra­tion in Eskom’s fi­nances, which led to the gov­ern­ment al­lo­cat­ing an ad­di­tional R59bn over the next two years to the power util­ity, putting fur­ther strain on the coun­try’s fi­nances.

The ex­tra money, with no con­crete plans to cut spend­ing, prompted the gov­ern­ment to in­crease its bor­row­ing in the bond mar­ket, mean­ing the bud­get deficit and debt lev­els will ex­ceed fore­casts con­tained in fi­nance min­is­ter Tito Mboweni’s bud­get in Fe­bru­ary.

Moody’s In­vestors Ser­vice, which is the only ma­jor rat­ings agency with an in­vest­ment­grade rat­ing on SA’s debt, is due to re­view its as­sess­ment in Novem­ber, af­ter Mboweni presents the medium-term bud­get pol­icy state­ment in Oc­to­ber.

A down­grade could see the coun­try fall­ing out of key bond in­dices, which would force some in­vestors to sell, weak­en­ing the rand and rais­ing the coun­try’s bor­row­ing costs.

Retail sales data that ear­lier showed greater than fore­cast growth in June, sig­nalling that the econ­omy will avoid its sec­ond re­ces­sion in 2019, was, how­ever, not enough to shield the cur­rency.

By 6pm on Wed­nes­day, the rand was down 1.85% at R15.4152/$, push­ing its drop for 2019 to 6.75%, the third-worst per­former among emerg­ing­mar­ket currencies. It was 1.52% weaker at R17.1722/€ and lost 1.87% to R18.5895/£.

The cen­tral bank may be “spooked by the rand’s re­cent weak­ness”, Capital Eco­nom­ics se­nior emerg­ing-mar­ket econ­o­mist John Ash­bourne said in a note.

While the coun­try’s muted in­fla­tion rate, ex­pected to be around the mid­point of the Bank’s 3%-6% tar­get band in 2019, meant that there was room for one more rate cut in 2019, “the win­dow of op­por­tu­nity will soon close”, Ash­bourne said.

/AFP

Back­track blow: SA dou­ble Olympic cham­pion Caster Se­menya at the Stan­dard Bank Top Women Con­fer­ence in Jo­han­nes­burg on Wed­nes­day. She will not be able to de­fend her 800m ti­tle at the world cham­pi­onships in Septem­ber af­ter the Swiss Fed­eral Tri­bunal re­versed a rul­ing that tem­po­rar­ily lifted testos­terone reg­u­la­tions im­posed on her.

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