Global Courant 2023-05-26 16:59:16
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The rand fell significantly, setting a new overnight low, with the exchange rate approaching R19.83 per dollar. The outcome of the monetary policy committee meeting on Thursday was mainly responsible for this decline. Analysts are divided on the factors contributing to the rand’s weakness. Some worry about the economic fallout from another aggressive rate hike, while others blame the slump on the monetary policy committee’s more dovish tone.
The rand fell to a new all-time low on Thursday evening, reaching R19.8279/$, representing a staggering 26% loss in value from the previous year. In the past two weeks alone, the currency is down 8%, which can be attributed to the United States’ recent accusation that Russia received weapons in South Africa.
After the meeting of the South African Reserve Bank’s monetary policy committee on Thursday, the sell-off continued. Some analysts attribute the slump to central bank governor Lesetja Kganyago’s less aggressive stance on future rate hikes. Kganyago stressed that while the bank had been tightening monetary policy for some time, it had not yet entered “restrictive territory.” His statement was interpreted as an indication that the bank should not raise interest rates any further.
Higher interest rates tend to make peripheral assets more attractive to international investors. However, the prospect of other countries raising their interest rates reduces the attractiveness of the rand. In contrast, some analysts believe that the rand’s sharp fall could be attributed to concerns about the potential economic fallout from another aggressive rate hike. South Africa is already on the brink of recession due to the negative effects of divesting the country.
Michelle Wohlberg, a fixed income analyst at Rand Merchant Bank, speculated that the currency’s poor reaction to a rate hike could signal a policy blunder. “The yield curve steepened aggressively after the rate hike as investors fear budgetary concerns due to poor growth prospects,” she said. The impact was visible on Thursday in the sharp fall in government bond yields.
Brendan McKenna of Wells Fargo Securities, an emerging markets strategist, expressed concern for the local economy, saying: “It is difficult at this point to make a really compelling case for deploying capital in South Africa and the periphery. .” He stressed that the rand has underperformed as an emerging market currency this year and is likely to continue to do so based on comments from the South African Reserve Bank.
Governor Kganyago expressed concern about the possibility of further currency weakness, citing the risks of inflation, significant domestic and external financing needs and continued tax cuts. Bloomberg’s prediction model, based on rand options trading, predicts that the rand will fall below the R20/$ level in the coming week.
Despite the current situation, FNB portfolio manager Wayne McCurrie noted that the rand has a history of recovering from record lows. He was bullish on the medium-term outlook, saying: “The outlook for the medium-term rand remains positive.” The fair value is still less than R17/$, and every time the rand fell, it recovered to the fair value.”
In the short term, however, the weakened rand is likely to contribute to South Africa’s high inflation. The country relies heavily on imports for fuel, and major crops such as corn and wheat are priced in dollars at import and export parity.
The rand was trading at R19.71 per dollar, R24.34 per pound and R21.16 per euro on Friday morning.
