The rand’s two-month recovery has come to a screeching halt, sliding as much as 7% against the dollar as the resurgent greenback and rising US bond yields dampen appetite for emerging-market assets.
The rand is hypersensitive to global sentiment, which remains skittish as investors try to predict the policy path of central banks in the developed markets, most notably the US Federal Reserve, which has said its decisions on interest rates will be data dependent.
The currency rallied from R18.67 to the dollar to R17.60/$ in June and July, as power cuts became less frequent and severe, and diplomatic tensions eased after Russian President Vladimir Putin said he would attend the Brics meeting online.
The US and SA showed signs of co-operation, as the former awarded Eskom a grant for technical assistance. The Federal Reserve seemed to pause its rate-hiking cycle, as US inflation moderated. These developments created a supportive environment for the rand.
But it has since made a sharp U-turn, trading at R18.67/$ on Thursday afternoon, down 1.1% on the day, as the dollar strengthened on robust US economic data and expectations of higher interest rates.
The sharp reversal of its recent gains coincided with a rebound in the dollar against a basket of currencies after US government bond yields rose, suggesting interest rates in the world’s biggest economy could stay elevated for longer than expected. Higher US rates tend to attract capital to dollar-based assets at the expense of riskier emerging markets such as SA, which also faces domestic challenges such as slow growth, high unemployment and electricity shortages.
The yields on the benchmark US treasury note stood at 4.17% in late trade, the highest since November, according to Infront data, reflecting the market’s anticipation of tighter monetary policy by the Federal Reserve.
‘Collateral damage’
“It’s a global story of a strong dollar with the US economy remaining solid despite higher interest rates,” said Izak Odendaal, investment strategist at Old Mutual Wealth. “The rand is suffering collateral damage,” he said, adding that a decision by Fitch to strip the US of its coveted triple-A credit rating played second fiddle.
Global markets were broadly weaker on Thursday, though a lot calmer than Wednesday when the JSE all share index shed 2.75% in its biggest one-day loss since mid-March.
The rand’s retreat comes while international oil prices are rebounding, dimming prospects of a cut in interest rates.
While the increase in consumer prices has been moderating since the peak a year ago, the inflation rate has yet to sustainably return to the 4.5% midpoint of the Reserve Bank’s target band. However, the Bank held rates steady in July for the first time in 18 months.
“A strong US economy based on GDP and jobs data has traders speculating that we might see another rate hike in September,” said Nolan Wapenaar, co-chief investment officer at Anchor Capital. “It is difficult to pinpoint what sparked the risk-off shift. However, while this sentiment persists, the rand will remain on the back foot.”
Wapenaar said the local unit has “fallen out of bed”.
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