No relief in sight as rand keeps tumbling
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: businesslive.co.za