Rand Report : Rand under fire amid Russian weapons accusations: Image: Supplied

Rand Report: Rand under fire amid Russian weapons accusations

The South African rand remains under pressure, courtesy of local economic concern. Its recent weakness can be due to the power supply crisis.

by Sable International

16-05-2023 14:51

in Business & Finance

Rand Report : Rand under fire amid Russian weapons accusations: Image: Supplied

The South African rand remains under severe pressure, courtesy of local economic concerns. While other emerging market currencies have yielded positive performances in the forex market, the Rand has diverged from its counterparts.

The recent ZAR weakness can be attributed to the country’s power supply crisis. Market participants have not taken the state of Eskom lightly, which has continued to constrain economic activity. With continuous switching between stage 4 and stage 6 load shedding, and speculation that stage 8 will be implemented ahead of the upcoming winter, sentiment is turning towards the possibility of a full grid collapse. With most South Africans spending between six and 11 hours a day without electricity, it comes as no surprise that foreign investors are turning away.

To add fuel to the fire, the rand was struck by another round of headwinds last week when the United States accused South Africa of supplying Russia with firearms. US Ambassador to South Africa, Reuben Brigety, claimed that weapons and ammunition were loaded onto a Russian cargo ship that was docked in the Simons Town naval base, in Cape Town. Despite South Africa claiming to maintain a neutral position on the war in Ukraine, reports of the Russian arms shipment have spawned the possibility of South Africa being hit with Western sanctions and could be punished by losing its access to AGOA (African Growth and Opportunity Act).

Further ramifications

As a result of these political and economic factors, there was a violent sell-off in the South African bond market. The yield on South African 10-year instruments rose by 8.0% last week, climbing from 10.13 to a high of 11.115, before ending the week at 10.94. The spread between South African 10-year bonds and US 10-year bonds widened by a staggering 11.44% last week, highlighting the increase in risk perception and rising term premium for financial assets in the local region. The spread between South African 10-year and German 10-year bonds also widened by 9.97%, indicating a deterioration of investment quality on the South African end.

Bond outflows have taken a significant toll on the ZAR in recent sessions, with the currency spiralling against all the majors. The USD/ZAR shot up by another 4.98% last week, adding to consecutive weeks of depreciation. The currency pair started at R18.40 on Monday and climbed to a high of R19.51, following the US’s accusations against South Africa. The pair closed trade marginally below the weekly high at R19.32.

The South African Rand and Great Britain Pound combination

The GBP/ZAR pair also appreciated by a sizeable 3.53% last week, rising from an open of R23.27, gliding through the R24.00 resistance level and reaching an all-time high of R24.46. After topping out during the later rounds of last week, the pair experienced a partial correction and ended at R24.07 on Friday. EUR/ZAR encountered similar price action, moving 3.36% to the upside. After opening at R20.31 and reaching a maximum price of R21.33, the pair closed slightly below the R21.00 level at R20.96.

The ZAR is at an all-time low, having overshot its deteriorating fundamentals and is looking extremely cheap. The rand might reverse its recent movement over the coming months, should local economic conditions begin to stabilize. However, unless investor confidence returns and the bond sell-off halts, the ZAR is likely to remain under pressure in the short term.

There was some noteworthy data released last week. The US inflation rate came in at 4.9% in April, down from 5.0% in March and in line with market expectations. However, on a month-on-month basis, price pressure rose by 0.4%, adding to the 0.1% increase in the prior month. Producer prices also experienced a 0.1% (MoM) uptick.

Over in the UK, the Bank of England’s (BoE) interest rate decision was released. The BoE raised their benchmark rate by 25 basis points (bps), from 4.25% to 4.50%, as expected. The UK GDP growth rate as of March was also released, indicating that GDP shrank by 0.3% over the month despite expectations for GDP to remain flat.

Locally, a handful of production data was released. Manufacturing production declined by 1.1% in March, adding to the 5.6% contraction in February. Mining production also shrank further in March, falling by 2.6% after the 7.6% decline in the prior period. Although both figures were bleak, neither of them matched up to the production reduction that was anticipated by market analysts. On a positive note, there was a significant 21.6% jump in gold production, adding to the 1.5% rise in February, despite expectations for gold production to decline. Given the soaring gold prices at present, this is likely to aid the country’s trade position.