Why the rand is weakening

13 Oct, 2017 - 00:10 0 Views
Why the rand is weakening The rand has come under pressure since the credit rating was downgraded on Monday

The ManicaPost

The recent weakening of the rand against the dollar is more likely a case of dollar strength than rand weakness, according to Nick Downing of Overberg Asset Management. In early afternoon trade on Monday, the rand stood at R13,79 to the dollar.

“The dollar has strengthened against all currencies since US President Donald Trump came out with his tax reform proposals, causing emerging market (EM) currencies to weaken against it,” Downing told Fin24.

Andre Botha, a dealer at TreasuryOne, noted that rand had lost more ground against the greenback than any of its emerging market peers over the past week. But the reasons behind the rand’s decline “remains a bit of a mystery”.

“One simple reason could be that the South African market is usually the guinea pig in the emerging market currency market, with the rand exaggerating its moves compared to emerging market peers due to the ease of access to its market,” said                  Botha.

Botha noted that economists would be keeping a close watch on South African manufacturing and mining data numbers, which will be made public on Tuesday and Thursday this week respectively.

“Should the number disappoint we could see a knock-on effect in the gross domestic product number in next couple of prints,” he said. Poor GDP numbers would “not bode well for ratings agencies’ decisions expected in December”, he said. Botha said that, as Monday is a public holiday in the US, rand-dollar trade was expected to be “relatively calm” with narrow trading ranges overall.

“The rand feels very heavy at the moment, and we could see the rand slowly making its way back. Risks are concentrated to the end of the week with the rand at the mercy of international events this week,” he said. John Cairns of Rand Merchant Bank agreed that dollar strength was impacting the rand.

“The dollar continues its pattern of intermittently pushing stronger, driving everything before it, including the rand,” he said.

“Risks are focused on the dollar. Friday will be particularly important given the release of US CPI (consumer price index) and retail sales data, with sentiment driving moves in the interim,” he said.

“Last week we suggested that after aggressive gains, the greenback might be stabilising. We were wrong. It was only the pace of the rally that has slowed, with the euro/dollar rate in particular still managing to make intermittent lower lows over the past week.”

As a result, Cairns said that the dollar/rand rate has continued its upward trend. Despite the rand weakening, RMB continues to hold its view that the rand will end 2018 at 13:00 to the dollar.

“The main reason for this is that even with recent weakness, the rand is still trading within existing ranges and there is still a high number of event risks that could easily see the recent rand moves reverse,” said Cairns.

Evan Walker of 36ONE told Fin24 that a couple of issues could be impacting the rand at the moment, like funding concerns for South African Airways (SAA) and Eskom.

In Walker’s view a downgrade could be expected by ratings agency S&P in November. At the same time, he sees about a 90 percent probability of a US rate hike in December, given the latest moves of US ten-year treasuries.

In mid-July the rand managed to break below the R13 to the dollar level due to dollar weakness and the suspension of the proposed SA Mining Charter. A weaker dollar also enabled the rand to again dip below R13/$ at the end of August.

At that time Andrew Rissik, managing director of forex and international projects at Sable Grou, said the rand would continue to devalue as SA was not attracting long-term “sticky” capital. He said that rand strength at that time was in line with the EM peer group. – Fin24.

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