Emerging market contagion push


Emerging market contagion pushes the Rand lower

Last week’s gains were reversed after Wednesday due to fallout from the Argentinean Peso, and further emerging market contagion.

Emerging market contagion push


The Rand opened the week on a stable note, at R14.32 to the Dollar and R18.39 to the Pound on Monday. Significant gains were then recorded against the greenback during the latter part of Monday. Tuesday saw the Rand ranging mainly flat to both the US Dollar and Pound. The observed stability can be attributed to a slight uptick in risk appetite as global markets moved further into green territory. Risk appetite was also fueled by the NAFTA talks between the US and its North American trade partners.

Wednesday saw volatility return as the Rand reversed previous gains and ended the day lower at R14.37 to the greenback and R18.69 to the Pound. This downward movement was reflected in the Lira as volatility in emerging markets picked up again.

The Rand continued its downward movement for the rest of the week, especially on Thursday after Argentina raised interest rates to 60%. This, together with Argentina’s fiscal woes, saw the Peso lose 18% (having shed half its value this year). The Peso and the Turkish Lira (among others) were the main driving force behind the weakness in emerging markets. This weakness spilled over into the Rand on Thursday and Friday and contributed to the lower movements on those two days. This is evident in the fact that the Rand opened at R14.29 to the greenback on Thursday and closed at R14.77 on Friday.

The above trends can be expected to continue well into this week as the slowdown in emerging market economies remains unabated. The Rand continued to lose ground to major currencies this Monday and opened at R14.97 to the Dollar this morning.

The coming week will be dominated by the South African GDP, the Australian RBA interest rate decision and the US non-farm payroll data.

Date What’s happening Why it’s important
Tuesday 4 September ·         Australian RBA interest rate       decision

·         SA GDP growth rate q2

·         US manufacturing PMI

· A higher interest rate will lower the money supply in the medium to long term and drive strength into the AUD.

· GDP indicates economic strength. A stronger economy will drive positive sentiment into the Rand.

· Manufacturing performance is a useful indicator for demand for imports. This may drive the USD into strength territory against the Rand.

Wednesday 5 September ·         Australian GDP data

·         SA Standard Bank PMI

· A stronger GDP will drive strength into the AUD against the Rand.

· The PMI is a useful indicator for the strength in the private sector of the economy. This in turn also drive positive sentiment into the Rand.

Friday 7 September ·         SA foreign exchange reserves

·         EU GDP data

·         US non-farm payroll

· An increase in the forex reserves will improve the strength of the Rand in the short-term (all else being equal).

· Strength in the EU economy bolsters the EUR against the Rand and remains a useful indicator for long-term EUR strength.

· Non-farm payroll continues to feature high on forex trade calendars. Markets are usually volatile for a short period after release of this data/

– Justin Fortuin