Rand bursts through R15/$ as Eskom sparks downgrade fears

The rand dropped to its weakest level in almost a year on Wednesday, breaking through the psychologically important level of R15 against the dollar as investors fled local assets after Moody’s Investors Services warned that Eskom was in urgent need of a turnaround plan. 

The rand weakened as much as R15.18/$ during Wednesday’s session as the market reacted to Moody’s warning that the R105bn two-year bailout for Eskom cannot do more than stabilise the troubled power utility and that a longer-term solution is required. 

A weaker rand will raise the costs of imports and stoke local inflation, reducing the chances of the Reserve Bank cutting interest rates in coming months.

“The fact we’ve traded R15/$ says that a lot of people are pessimistic about Moody’s and that there is a chance of an outlook or downgrade,” said Standard Charted global head of emerging markets FX research Geoffrey Kendrick.

Kendrick added that he is optimistic that Moody’s is unlikely to downgrade SA’s credit rating in the coming months.

“Moody’s has had the chance to downgrade SA for the last two years. Although the issues on the ground have deteriorated marginally, they have not deteriorated dramatically. If Moody’s wanted to downgrade SA, they would have done it already. It seems to me that Moody’s is trying to give the newly elected government some time.”

The local currency was stronger earlier but still remained under pressure after China dialled back the depreciation of the yuan on Tuesday. On Monday, the US labelled China as a currency manipulator after the yuan dipped below the 7/$ level.

The latest spat in the prolonged trade war reduced appetite for riskier assets, creating favourable conditions for precious metals. The shift of investors to safe-haven assets saw spot gold break through $1,500/oz, its best level in six years.

London-based Sharps Pixley CEO Ross Norman said gold could revisit record high levels of around $1.920/oz which it reached in 2011. “At the moment the stars are aligned for the gold market. I still maintain that we are in the early stages of a bull run and gold is at an all-time high in rand terms,” Norman said.

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