Rand flirts with R19/$ on myriad risks

Having been hit by a plethora of bad news this week, the rand is eyeing its worst level since the early stages of the Covid-19 pandemic and appears set to break through R19/$.

News on Tuesday that SA’s economy performed far worse than expected in the fourth quarter — mainly as a result of persistent load-shedding — and hawkish comments from US Federal Reserve chair Jerome Powell later in the day saw the local currency fall more than 2% on Tuesday, the most in five weeks.

MyWealth investment CEO Annatjie Van Rooyen said a “lethal cocktail of local and external factors can possibly drive the currency to target R19/$ in the medium term”.

Wednesday’s intraday weakest of R18.71/$ was the worst on record, discounting the onset of the pandemic when the rand hit R19.34/$ as investors rushed to the relative haven of the dollar amid global concern and uncertainty.

IG senior market analyst Shaun Murison said that while emerging market currencies in general have been driven weaker by a general risk-off mood, “the rand’s short-term underperformance in the emerging market space can be attributed to domestic news”.

“Recent news of the country’s greylisting, which was followed by a not-so-inspiring cabinet reshuffle by President Cyril Ramaphosa, bodes negatively for foreign investment into the country and couples with weaker-than-expected economic growth,” Murison added. “SA’s growth outlook is further stifled by ongoing electricity struggles.”

Markets were uninspired by Monday’s cabinet shake-up in which Ramaphosa made no changes to the mineral resources and energy and public enterprise portfolios.

As SA deals battles the most intense load-shedding ever, analysts say the ministers heading two departments should have been replaced. Furthermore, the appointment of an electricity minister is regarded as unnecessary since the new department does not come with powers that were not already available to the other departments. There is also concern that the electricity shortages will now be handled by three different ministries, which could lead to further duplication and overlapping of responsibilities.

“The reshuffle seems to have presented a lot of the same playing cards in different positions, and perhaps speaks to the president’s second term presidential campaign rather than fixing a country which is in crisis,” said Murison.

The biggest risk factor on the horizon for the rand is US nonfarm payroll data, due on Friday.

Any number significantly above expectations of 203,000 jobs being added will be negative for the local market and could prompt the Fed to raise interest rates by more than expected at its March 21-22 meeting.

“Markets have already discounted an increase of 25 basis points at the meeting in March and a similar rise in June, but strong economic data might pave the way for a 50bp hike in March and a higher terminal rate than the anticipated 5.25%,” Van Rooyen said.

US interest rate hikes could narrow the inflation and interest rate differential between the US and SA, making SA more vulnerable to capital outflows from the bond market, putting further pressure on the rand.

Higher US yields tends to lure money away from emerging markets, which are seen as more risky investments.

“The SA Reserve Bank is cognisant of inflation risks associated with rand weakness and should the rand move meaningfully above 19/$ it would very likely respond more aggressively on tightening,” said Carmen Nel, economist and macro strategist at Matrix Fund Managers.

“With the dollar on the front foot and the huge risk premium built into the rand, we don’t believe that in the short term the rand could stage a rally. We need to wait for US data to disappoint to see the rand firm significantly,” said TreasuryONE senior dealer Andre Botha.

“Should the US non-farm payroll number print higher than expectations, then we could see the rand under further strain, and a likelihood of R19/$ becomes more of reality.”

At 3.37pm the rand was trading at R18.54/$, 0.27% stronger on the day, while generic 10-year SA bonds were yielding 10.18% as the prices of the notes fell, after reaching as low as 9.465% five weeks ago. 

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