Rand falls to 12-week low as investors’ spirits sink

The rand, trading as recently as February 24 at its strongest level in more than 13 months, breached R15.50 for the first time in eight weeks on Monday as prospects of higher inflation and interest rates in major economies saw investors pull money from emerging markets.

SA’s currency slump to an intra-day worst level of R15.57/$, taking its loss for 2021 to 5.15%, was a huge turnaround.

The rand had been one of the main beneficiaries of a rally among risky assets since late 2020, boosted by Joe Biden’s victory in the US presidential election in November, which was set to pave the way for a major stimulus package. That built on optimism of a return to normality for the global economy as nations started to roll out Covid-19 vaccines.

The rand is often a proxy for investor sentiment on emerging markets as it is among the most liquid emerging-market currencies so traders often sell it to cover potential losses from markets from which they cannot easily exit. But it is caught up in a different mood as investors fear the $1.9-trillion US package will stoke inflation and the US Federal Reserve will raise low interest rates faster and sooner than expected, hitting demand for stocks and higher-yielding bonds in emerging markets.

A fast, prolonged rand selloff may also revive concern that the Reserve Bank will have to raise rates to fight an inflation surge at a time when the economy is still weak and in need of the stimulus provided by the lowest official rate in about 50 years. A weak rand boosts the price of imports and may threaten the Bank’s inflation target, though few economists think that a real danger in the short term with consumer confidence and demand depressed, and consumer-price growth well below the midpoint of its 3%-6% goal.

With flows to emerging markets negative, the rand is among the worst performers along with Mexico and Brazil. At 7.05pm, it was 1% weaker at R15.50, taking its fall in the past week to 2.28%. It was 1.12% lower at R21.45/£ and fell 0.55% to R18.38/€.

The rand’s drop was due to “severe market risk-off” though the currency was also vulnerable to domestic concerns with ratings agencies not convinced that the government will stick to the debt-consolidation targets in finance minister Tito Mboweni’s budget, said Investec chief economist Annabel Bishop.

While a rapid return to prepandemic conditions should be good for SA and prices of commodities it exports, traders are concerned about the prospect of the US Fed pausing, or even reversing its stimulus measures. Fed chair Jerome Powell did little to ease concern last week, giving investors no indication of action to arrest a rise in US yields.

This served as a “double whammy” for the rand, seen as a risky asset, while spiking yields in global bonds weighed on the price of gold, Axi chief global markets strategist Stephen Innes told Business Day in response to e-mailed questions. “I think the outlook over the short term looks negative,” he said.

Gold is seen as a hedge against inflation, but rising bond yields weigh on its relative value, offering investors better returns from government debt. A higher gold price often benefits the rand, as it is a key source of SA’s foreign earnings.

Foreign bondholders sold a net R26bn in SA government debt since the year began, with about R20bn sold off net since the budget speech, according to JSE statistics. SA’s 10-year bond yield, which moves inversely to price, was little changed at 9.54%, after hitting the highest point since early October 2020.