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The rand crashed through the R20 barrier to the pound on Wednesday, the first time since the crazy days in Jacob Zuma’s presidency when then finance minister Pravin Gordhan faced arrest for espionage.
A day after it was battered by SA’s shock slide into its first recession since the outbreak of the global financial crisis, the latest currency slump was driven by events further from home after an emerging-market sell-off that sent currencies lower from Mexico to India.
The rand fell to as low as R20.1132 against the British currency, the weakest level since May 2016. It was at R19.94 at 6pm local time, having earlier dropped about 2%. It also dropped about 2% against the US dollar to R15.4257, taking its fall this week so far past 5%.
The latest slide, which has pushed the drop against the dollar in 2018 to 19.31%, is prompting economists to question how long the SA Reserve Bank can maintain its stance of not raising interest rates.
A weaker rand typically pushes inflation higher by increasing the price of imported goods, including oil, which is trading near its highest since May in international prices.
SA had been hit by a “double whammy” of domestic political issues and reduced liquidity on global markets, said Nedbank Corporate and Investment Banking strategist Mehul Daya.
Contagion from financial crises in Turkey and Argentina returned to the fore.
Pressure on emerging-market currencies was also reinforced by speculation that the US economy’s strength will lead to further interest-rate increases from the Federal Reserve, boosting the attractiveness of dollar-denominated assets.
Rising populist pressures within the government was also weighing on the currency, with the recent R500m government intervention to prevent a fuel price increase adding to investor concerns, said Econometrix MD Azar Jammine.
This move was unlikely to endear SA to investors or ratings agencies, and could represent the “thin end of the wedge”, Jammine said.
He said that the slide in the rand represented this additional element of risk.
Rand weakness spilled over into the JSE, with interest rate-sensitive stocks, such as banks and retailers, the hardest hit this week.
A weak economy will likely lead to more job losses and hurt consumer spending, while higher interest rates in response to a weak currency and a worsening inflation outlook raises the risk of bad loans for banks.
The rand’s weakness gathered speed this week after data showed that the economy had contracted 0.7% in the second quarter, adding to a 2.6% drop in the first three months of the year.
The rand’s role as one of the most easily traded emerging-market currencies created a toxic mix for the currency, which tends to be sold by investors seeking to reduce their emerging-market risk more broadly.
The rand’s baseline projection for the end of 2018 was R14 to the dollar, said Bank of America Merril Lynch analysts Rukayat Yusuf and Ferhan Salman.Source: Business Day Live
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