Rand stumbles to within hair’s breadth of R14/$ as global risk sentiment sours

For its part, the Turkish central bank has raised interest rates aggressively in an attempt to support the lira, which is now the worst performing currency so far in 2018. Turkish President Recep Tayyip Erdogan has reportedly tightened his grip on fiscal and monetary policies following an election victory.

“Increasing the pressure on the lira was the defiant tone of Erdogan this morning. This suggests to the market that they may not see the sort of fiscal tightening markets are demanding while the finance minister delivers the ‘New Economy Plan’ later today,” Jane Foley, senior currency strategist at Robobank International. “To regain its credibility there is talk that the central bank may have to hike rates by 5% or even 10% next month, though this would be a considerable back down by Erdogan.”

The poor global sentiment set the rand on track for its worst weekly decline against the dollar since mid-May on a closing basis, potentially dealing a blow to any relief from high fuel prices.

The rand was also under pressure from a strong dollar, courtesy of a weak euro, which was at its lowest level in just more than a year following the FT report.

The weaker rand has the potential to stoke inflation, which has steadily been rising from its seven-year low, reached in March. In July, the Reserve Bank kept rates on hold, citing inflationary pressures.

“The risk dynamics are not supportive of the rand at the moment,” ETM Analytics analyst Halen Bothma said. “The sharp weakness in the rand reflects the risk-off environment that has emerged because of the idiosyncratic challenges we have seen in Turkey and Russia.”

On Thursday, the Russian rouble hit its lowest level against the dollar in two years, after the US announced fresh sanctions over the Novichok poisoning case in Salisbury, England. The US said it would impose sanctions later in August, after concluding that Russia used the Novichok nerve agent to poison Sergei Skripal and his daughter Yulia.

The weaker rand reflected badly on local banking stocks, in particular, which are sensitive to interest rates.

Local bonds were similarly sharply weaker in early afternoon trade, with the yield on the benchmark R186 bond rising to 8.83% from 8.68%.

At 1.35pm, the rand was at R13.8820 to the dollar, from R13.7070 at the US close on Thursday. It was at R15.9065 to the euro from R15.8015, and at R17.7274 to the pound from R17.5780.