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By Andre Botha, Senior Dealer, TreasuryONE Last week was a “rollercoaster” week for the rand, with the rand weakening for nine straight days. The rand lost around R1.50 or just over 10%. Interesting to note that the Rand and Brazilian Real were the two worst-performing currencies over the past two weeks. These two currencies were also the two best-performing currencies for the year until mid-April. It is only natural to look for an explanation for the sudden weakness, and there are a couple of factors that were cited as possible reasons for the weakness:
Strength of the US dollar
The most obvious has been the strength of the US dollar. While the rand has been very resilient so far against any US dollar moves, that dam wall could only withstand so much pressure. The US dollar flirted breaking below 1.05 against the euro on the back of a “risk-off” scenario with the market pricing in quite drastic hikes from the US Fed and anticipating that the fall-out of those hikes will lead to market players running toward the US dollar.
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Covid lockdowns
Renewed COVID lockdowns in China have all but closed their economy, and we’ve seen the Chinese Yuan losing a lot of ground on the back of that.
The global supply chain issues that previous lockdowns have caused will also again start weighing in on the global economy, with lower growth not fertile ground for EM economies and EM currencies. The slowdown in China will also affect demand for commodities, which are vital for the South African economy, and lower commodity demand will also negatively affect the rand.
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Performance of the Rand
The final factor is more Rand based, and that has to do with the performance of the rand in general over the year. The rand almost traded as a safe haven currency, and at some stage, the rand had to give up some of that strength, and it just so happened that the pullback of the bungee chord coincided with a few other “risk-off” factors.
However, the exact reasons why the rand was as resilient are still present, like the South African terms of trade, yield and relatively high commodity prices, which gives us the notion that the rand could recover from these elevated levels.
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US interest rate decision
This week is a short but action-filled week, as we have the US interest rate decision today. The expectation is for the Fed to raise interest rates by 50 basis points, and that rate hike has been priced into the market already. However, the key would be the speech after the rate announcement. The market would try and get a sense of the Fed’s hiking path going forward. Another vital data sets out this week is the US non-farm number. This number is critical to show the robustness of the US economy, given the challenging economic climate ahead.
On the rand side, we expect the rand to follow the direction that the Fed will give the market today. We have seen huge moves in the currency over the past couple of days, with the rand trading up to R16.20 on Monday only to reverse that loss and trading back to R15.75 at the close yesterday. We still feel these are good levels for exporters to cover some exports and we believe that better tidings are ahead for importers.
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