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
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.