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China, drought weigh on the ZAR

The week began with the Rand falling more than 2% against the US dollar, one of the weakest performances in a basket of emerging currencies.

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The Rand remained on the back foot, but recovered slightly later on in the week from 16.8410 USD/ZAR to trade around 16.50 USD/ZAR on Friday. The ongoing international oil price weakness was not enough to boost the Rand.

The Rand, along with other commodity-based currencies, has recently under performed due to growth concerns with the Chinese economy. The risk of a possible credit rating downgrade in the first quarter of 2016 has placed additional strain on the South African currency.

Adding to the woes, sub-Saharan Africa is experiencing the worst drought since 1992, triggering a downward spiral of the South African Rand (ZAR) exchange rates as economists fear a recession. Although agriculture only contributes 2.3% to SA’s GDP, the impact of the drought could trigger a domino effect; rising food prices will put pressure on consumers.

What to look out for next week: Markets are anxiously awaiting the release of Chinese economic growth data for the last quarter of 2015 on Tuesday. Commodity currencies need China to buy their raw materials; a strong Chinese economy is usually Rand positive.

On Wednesday, South Africa’s CPI will be released. Consensus is that inflation will have risen from 4.8% y/y in November to 5.2% y/y in December.

-Calvin Matsaure

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