Rand a one-way bet after 13% fall

R14.01 caps rollercoaster ride

THE RAND slid to its second worst level ever against the dollar yesterday as emerging market turmoil forced investors to pare back exposure to riskier assets further.

Weekend comments by SA Reserve Bank (SARB) governor Lesetja Kganyago vowing no action from the bank to try and defend the rand, also raised concern that the local currency could now also be vulnerable to negative speculative attacks.

The rand’s slide to R14.01 against the dollar in late trade yesterday capped a rollercoaster two-week run over which the rand has increasingly become a one-way bet, falling more than 13 percent since late July.

While Kganyago acknowledged, as he has done in the past, that the bank could not do much to stem the currency slide, his comments increased the risk of more downside to the currency, according to analysts.

Failed attempts in the past to shore up the rand by intervening in the markets have made the SARB circumspect about the heavy cost of trying to defend the currency.

The bank’s intervention proved futile back in 2001 as the rand dived through R13 against the dollar. That slide ultimately led the government to set up a commission of inquiry to look into the cause of the rand’s sharp depreciation.

Chinese demand

Unsurprisingly, through yesterday the rand ranked among the worst performing emerging market currencies, partly reflecting concerns about the impact faltering Chinese demand, an ongoing decline in global commodity prices and the threat of looming interest rate increases in the US.

Slowing Chinese demand will hurt South African mineral exports at a time when the country needs steady foreign currency inflows to service its current account deficit.

Analysts at Bidvest Bank said in a market commentary that Kganyago’s comments suggested that the SARB lacked the appetite for interest rate hikes. A surprise 25 basis points hike on July 23 failed to provided any cushion to the rand, and instead raised fears that the SARB’s hawkish stance might jeopardise growth as borrowing costs go up.

The SARB justified the July hike by saying it was part of a process to “normalise” interest rates. Normalisation is market speak for pushing rates higher on the premise that the days of cheap liquidity are over if the expectations for a rate hike by the US Federal Reserve are anything to go by.

But even more worrying is the current economic backdrop. Recent figures from Statistics SA showed that gross domestic product shrank by 1.3 percent in the second quarter, raising the possibility that growth might again stall this quarter – a scenario that would put the country in a technical recession. Key indicators, including those for business confidence and factory activity, have continued to worsen.

Economic backdrop

While South Africa is unable to escape the rout directed at the wider emerging market sphere, the unprecedented slide in the currency could raise a serious dilemma for policymakers and investors.

The volatile currency makes its difficult for business to plan optimally, while at the same time adding to inflationary pressures. The continued slide also makes it almost certain that the country will see capital outflows.

Yesterday, analysts began asking whether the rand would see reprieve anytime soon. But even if the slide was halted, the currency would not bounce back before it had made more record lows, they said.

“Current trading patterns in the rand imply that the domestic currency could see a pullback later in the year. Our expectation is that it could first reach R14.50/USD early in the fourth quarter, if not late in September, before pulling back towards the R13.75/USD mark over 2016,” Investec group economist Annabel Bishop said in a note.

She said the rand risked falling into the R15/R16 range against the dollar should the SARB remain hawkish in the face of the country’s recessionary conditions and should the country see further loss of investor confidence on the downturn in the business cycle.

Bishop noted that in 2001 when the rand weakened to R13.84, it was on a spike in very thin liquidity conditions, with the rand moving from R12.62 on December 19, 2001 to R13.84 on December 21, then slipping back to R12.45 on December 24 as liquidity was restored.

But in the latest rout there have been flashes of similar volatility, trading patterns show. A mere two week ago, the rand tumbled to R14.06 – a record low – against the greenback, but then retraced its losses to the R13.40 range until it suddenly dropped to test R14.01 – its second worst level – late yesterday.

Ordinarily, the weaker rand should be a boon for exporters but manufacturing is in recession, while mining and agriculture are in the doldrums, raising the risk of job losses.