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After showing initial strength earlier this year, the rand has lost all its gains – and then some – and is currently weighing in at its weakest level in over two years, says Ryan Booysen, managing director of DG Capital Forex Solutions.
Booysen noted that the rand strengthened against the dollar during the first quarter of 2022, starting the year north of R15.57/dollar and reaching R14.40 at the end of March, before reversing and trading all the way back to and retesting the November 2021 highs at around R16.18 in April and May.
After a brief rally, the local unit has since slumped to levels over R17.00, last seen in July 2020, in the wake of the load shedding crisis, rising electricity costs and soaring fuel prices.
“Yet most of the collapse is due to dollar strength,” Booysen said. “The US dollar is at its strongest level in 20 years. The dollar index, which measures the value of the US dollar against a basket of six other major currencies, has strengthened some 12.7% since 1 January 2022 and 17.1% over the past 12 months, on the back of a hawkish Fed and the start of the US interest rate hiking cycle.”
“While other central banks are also on a tightening path – the SARB included – the Fed is doing so more aggressively than in the rest of the globe, hence the extreme strength of the US dollar. Combine this with a risk-off mindset provoked by recession fears in the US and Europe, the ongoing hostility in Ukraine and China growth concerns, which has seen a flight of assets to the safety of the greenback.”
To some extent, rand weakness has been prompted by South Africa’s electricity crisis and load shedding, leading to fears of a recession for this economy too, Booysen said.
“At the same time, the political jostling ahead of the ANC elective conference in December is creating a distraction for politicians and some fallout for the local currency. But the limited movement of the rand on the crosses indicates that the vast majority of the currency’s move can be attributed to dollar strength rather than innate rand weakness.”
Although the rand has given up double the gains made in the first quarter, the levels around R14.50/dollar were never sustainable, he said.
While the rand is currently trading around R17.09/dollar, the magnitude and speed of the move from mid-April to now has been ‘too much, too fast’ and thus there could be some reprieve for importers from current levels, he said.
“We do, however, expect the rand to remain under pressure for at least the next quarter. We believe the Fed and SARB are both overly hawkish and once they move to a more gradual tightening path, both the dollar and the rand should weaken.”
“I think we will remain under pressure during the current quarter because of external factors and we may see the rand strengthening into the end of 2022 – as global factors become more favourable – and if they don’t see massive traction being gained from the Radical Economic Transformation faction in the build-up to the ANC elective conference in December.”
The relative value is thus likely to remain more or less flat, although within a range of R16.40 – R17.50 in the near term and R15.80 – R17.50 over the next six months, Booysen said.
“The end of the Eskom strike, a return to normal power supply and any other positive news in respect of the rand could help the local unit to strengthen considerably.
“Importers should look for dips below R16.50/dollar to cover exposure, and keep buying down to R15.80 while exporters should wait for spikes back to R16.75 to step in and keep selling rand up to R17.50.”
Some rand weakness expected
Investec chief economist Annabel Bishop notes that market worries over high inflation are being increasingly replaced by fears of excessive interest rate hikes, driving economies into recession, and risk sentiment in global financial markets is fragile and significantly risk-averse.
“The second, and particularly third, quarters of the year are usually weak periods for the rand, as trade thins in risk assets, including emerging markets currencies and portfolio assets as the July/August months of peak northern hemisphere summer see senior (risk-taking) traders on vacation.”
“A narrowing of the interest rate differential between South Africa and US interest rates typically causes rand weakness as the relative interest rate return between rand and dollar assets diminishes.
“The rand has indeed been weakening in anticipation of this, as well as on load shedding, global growth concerns and most recently the negative effect on investor sentiment from the hawkish tone of the Federal Reserve Bank.”
Read: Rand passes R17 to the dollar as investors look at another week of load shedding in South Africa