South Africa’s rand and stocks lost as U.S. Dollar firms. Photo by Flickr
Rand sell-off continues amidst concerns over higher US borrowing costs and weak fundamentals
The Rand, along with its emerging market counterparts, has seen a significant sell-off in the last week. This action happens in the shadow of both the ECB (European Central Bank) and FOMC (Federal Open Market Committee) meetings this week. The local currency lost over 4% last week to reach a year low of R13.28 to the US Dollar. In anticipation of today’s Fed and ECB meetings, the Rand has weakened 0.82% from last week’s low, finding a new year-low of R13.39 to the USD.
South Africa’s rand and stocks lost as U.S. Dollar firms. Photo by Flickr
The Rand, alongside the Russian, Turkish, Mexican and Brazilian currencies, has become a victim of a massive increase in volatility. The Rand saw volatility gains of over 42% in the last week, the biggest quarterly increase since 2013.
Local fundamentals have also contributed to the ailing ZAR. Bond yields are down 1.5 basis points. Add to this the release of negative GDP data showing a contraction of 2.2% for the first quarter of 2018, and expectations of a wider current account deficit for the first quarter of 2018 (data being released next week Wednesday) and the Rand’s weakened position seems somewhat appropriate.
With the US Fed expected to hike interest rates today (while simultaneously signalling an aggressive path forward), and the ECB expected to taper off its quantitative easing by ending its bond-buying programme, emerging market weakness comes as no surprise. If interest rates are hiked to 2%, demand for the Dollar can be expected to rise – quite probably leading to a shortage of Dollars and hence inflated rates of exchange. This alongside increased US borrowing costs could mean that emerging market economies will bear the brunt of higher borrowing costs in the face of significantly weaker local currencies.
Investors are most likely positioning themselves for the days ahead and going forward it is altogether possible that the rapid weakening of the Rand has been an overshoot. How the Rand reacts to the ECB and FOMC meetings today should signal the direction the currency will take: Further weakness or stability if the move has been overdone.
| DAY | WHAT’S HAPPENING | WHY IT’S IMPORTANT |
| Wednesday 13 June 2018 | Retail Sales (YoY & MoM) | Retail Sales signal the health and/or wealth of the economy. Positive data in luxury items signifies a healthy economy. As always, results outside of expectations move markets: positive results = positive market effects and vice versa. |
| Thursday 24 June 2018 | Interest Rate Decision (MPC) | No change in rates is expected. Should there be an increase, there will be Rand strength while the opposite will happen should rates be decreased. |
– John-Edward Ferreira
