Rand faces more woes

• Breach of $15 plunged currency to five-month low that was sparked by indications the Federal Reserve might start paring its Covid-19 stimulus

The rand, which slid to its lowest level against the dollar in five months, may face months of volatility as investors await a timeline for a reduction of monetary stimulus by the US. On Thursday, the rand breached R15/$, dragged down as global markets were hit by concerns that the US may be getting ready to reduce monetary stimulus.

The rand, which slid to its lowest level against the dollar in five months, may face months of volatility as investors await a timeline for a reduction of monetary stimulus by the US.

SA’s currency, which weakened to all-time lows near R20/$ after the Covid-19 outbreak reached SA late in March 2020, has since been among the best performers, as recordlow interest rates and bond purchases in developed markets fuelled demand for higheryielding assets.

On Thursday, the rand breached R15/$, dragged down as global markets were hit by concerns that the US may be getting ready to reduce monetary stimulus. By 6.22pm, it was trading 1.7% weaker at R15.1858, its weakest level since March.

Minutes of the US Federal Reserve’s (Fed’s) July meeting on Wednesday evening SA time indicated that officials are leaning towards reducing monetary stimulus before the end of the year, amid a tight labour market and faster inflation.

The Fed has been buying $120bn of assets a month, which has set yield-hungry investors off chasing stocks and other assets offering higher returns, such as emerging-market bonds and currencies.

That statement sent stocks lower across the world on concern that tighter US policy would stifle the global economic recovery, which could reduce demand for the commodities that have supported SA’s finances. The steady flow of foreign exchange helped the rand strengthen to R13.42/$, its best level since February 2019, as recently as early June.

“Our base view is that the rand will face more headwinds during the rest of the year,” Nedbank chief economist Nicky Weimar said. “We therefore believe that the best spell is behind us and expect greater weakness and volatility over the next five months.”

The rand, often a barometer of sentiment towards emerging markets due to SA’s small and relatively open markets, fell as investors favoured safe-haven currencies such as the dollar, Japanese yen and Swiss franc.

Platinum, of which SA is the largest producer, fell 2% to the lowest since November. Palladium was at a six-month low, while losses by gold were more subdued due to its role as a safe haven. It was down just 0.27%. The JSE all share index tumbled by the most since November 2020, dropping 2.89%.

Commodity prices have partly shielded SA against the blows of the Covid-19 pandemic via higher mining taxes and royalties that boosted government finances. Mining exports totalled R600bn in 2020, according to HSBC, which has forecast a trade surplus equal to 6.1% of SA’s GDP for 2021.

Weimar said the tailwind from commodity prices will fade in the coming months because of slower growth in China, which has been disrupted by a resurgence of Covid-19 cases. The Delta variant is also weighing on other parts of Asia, while the effects of the US fiscal stimulus will also fade, she said.

“The Fed is clearly trying to telegraph its tapering intentions well in advance, so as to avoid a repeat of the surprise taper announcements of 2013,” said Mike Keenan, fixed income and currency strategist at Absa.

The rand has been among the most volatile major currencies and may catch out those who see it as a one-way bet. Just this week, Rand Merchant Bank said it saw the rand reaching R14.30/$ before end-December, though it could also be trading around R15/$ should investors shy away from riskier assets.

That was even as the FirstRand unit said that based on an index that compares the price of milk between countries, the domestic currency looked overvalued by 17.6%

WE BELIEVE THAT THE BEST SPELL IS BEHIND US AND EXPECT GREATER WEAKNESS AND VOLATILITY OVER THE NEXT FIVE MONTHS