The South African rand has so far been unable to escape the clutches of a broader emerging markets sell-off that shows no signs of letting up. The rand slid on Wednesday morning to six-month lows against eight of the FX G10 (the exceptions being the yen and Swiss franc) and has now suffered a double-digit fall on a trade-weighted basis in a little less than four months.
When last seen (06:15 GMT, Wednesday), the rand was trading at 13.34 to the dollar, on its session lows.
Assisting the rand on its way down was Tuesday’s US inflation data, which showed the fastest growth in US consumer prices in more than six years (CPI growth of 2.8 percent in the year to May). This comes against the backdrop of Wednesday’s meeting of the Federal Reserve at which US interest rates are widely expected to be increased to a ten-year high of 2 percent. Amid an environment of higher US rates and a stronger dollar, emerging market economies are facing higher borrowing costs and more difficult foreign loan repayments, leading to uncertainty among investors.
Unlike the central banks of Turkey, Indonesia, India and Brazil, the South African Reserve Bank is yet to offer support to its currency in the form of market interventions or higher interest rates of its own.
“Emerging markets such as India and Turkey have hiked interest rates in order to stem some of the currency losses, and the big swing in the rand is perhaps a reflection of South Africa not doing the same,” a senior analyst at FNB told fin24.
The rand is also doubted in light of minuscule growth in South Africa’s economy. The most recent round of heavy rand selling began on June 5th after Stats SA reported annualised economic growth of just 0.8 percent – well below market expectations and barely more than a tenth of growth in Turkey and India, currently 7.4 and 7.7 percent respectively.
In the coming weeks, there’s also the disheartening prospect of a wider South African current account deficit, due on June 21st, which seems to always weaken the rand. The short-term outlook for the rand, therefore, appears little better than what’s been offered up since late February.
In the medium term, all is not lost, however. South Africa’s Nedbank described the rand’s recent sharp decline as an “overshoot” and have forecast a marginally stronger rand by year-end, at 13.1 to the dollar.
Finally, for holders of rand, consider also the silver lining, if one can call it that: things could have been a lot worse. If not for the “Ramaphosa presidency effect,” writes Investec’s chief economist Annabel Bishop, the rand would “likely be…closer to R17.00/USD!”