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Rand Misery Piled On as South Africa Enters Recession

The rand fell sharply on Tuesday following news that South Africa has entered a recession. The dollar, meanwhile, continues to react favourably whenever the spotlight is turned towards US tariffs and a potential trade conflict with China.

Posted Sep 04, 2018

Stats SA announced on Tuesday a contraction in South African real GDP of 0.7 percent for the June quarter. It is the second consecutive period of economic contraction in South Africa, after contraction of 2.2 percent in the March quarter, which means the country has entered a technical recession.

South Africa’s currency, the rand, reacted to the news as one might expect.

Versus the dollar, the rand slid by 3.3 percent to 15.34 and has now shed the best part of 9 percent since trading below 14 to the dollar a week ago. Versus the euro, it fell 2.9 percent to a 2 1/2-year low of 17.77—that’s a loss of nearly 8 percent since last week.

Emerging market currencies are largely painted with the same brush and with that said, the rand had already been bogged down by this summer’s currency turmoil in Turkey and Argentina, and by a troublesome trade conflict between the US and China which seems no closer to being resolved.

On the matter of trade, the public comment period for President Trump’s proposed tariffs on $200 billion worth of Chinese goods ends on Thursday, after which tariffs can be implemented, although perhaps not immediately.

With little going its way, options traders remain pessimistic on the rand’s prospects over the coming months.

“The premium of options contracts to sell the rand over those to buy it in the next three months, known as the 25 Delta risk reversal, soared last week to 5.25 percentage points—the highest in almost three years and the highest level worldwide after Turkey’s lira,” explains the Business Day’s Paul Wallace and Colleen Goko.

As emerging market currencies like the rand lose out, the US dollar wins. The Dollar Index—a trade-weighted measure of the dollar’s performance—gained for the third day in four as it rose to an eleven-day high of 95.5.

“The dollar seems to be the main defensive currency of choice . . . [for] trade war concerns,” an SEB analyst told Reuters on Tuesday.

 
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