The rand, just after its biggest weekly drop in more than a year, may breach R13/$ for the first time in five months after a surging dollar and weaker emerging markets prompted foreigners to offload South African assets.
The rand hovered around R12.80 on Monday — after a 4.1% slide last week, which was the biggest since March 2017 — as traders awaited the latest inflation report and the Reserve Bank’s monetary policy decision. After initially being supported by the election of President Cyril Ramaphosa in February, the rand has weakened with its emerging-market peers as rising treasury yields boosted demand for dollar assets.
A weaker rand may fuel inflation, making it unlikely the Reserve Bank will be able to cut interest rates again and support an economy that is struggling with an unemployment rate close to 27%.
The rand has depreciated about 3% against the dollar so far in May.
This is in the context of losses of more than 12% for the Turkish lira and an almost 7% drop in the Mexican peso. Argentina’s peso has lost 19%.
The relentless strength in the greenback prompted Indonesia’s central bank to increase interest rates by 25 basis points last week, joining Turkey and Argentina, which have tightened monetary policy to defend their currencies.
“There seems to be no stop in the US dollar rally at the moment, but the feeling is that the elastic is becoming extended,” said TreasuryOne dealer Andre Botha.
The rand was expected, however, to continue to weaken towards R13/$ in the absence of improved sentiment towards emerging markets.
Portfolio outflows from SA accelerated in May as the Ramaphoria effect was steadily overtaken by global risk aversion, said Investec chief economist Annabel Bishop.
“SA benefited specifically on inflows early in the year as the new regime caused weightings to be increased towards the country. However, as global risk aversion has increased generally, these flows reversed this month,” she said.
Investec’s baseline forecast is for the rand to average R12.30/$ in the fourth quarter of 2018.
Foreign investors sold South African equities and bonds valued at just more than R20bn over the past week, putting a figure to the sharp drop in the value of the rand.
An additional net R10bn left local bonds during the week, helping push up bond yields in the process.