Rand reels in wake of investor sell-off in favour of gold bullion

The currency gallops towards the R20-mark to the US dollar in rapid decline

FINANCIAL markets in South Africa entered a new difficult terrain yesterday as the rand galloped towards the R20mark to the US dollar following a rapid decline triggered by investor sell-off.

Foreign investors have been dumping South African rand-denominated bonds in favour of safe havens like gold, selling a net R11.4 billion so far.

This rapid sell-off saw the rand breach the psychological R19-mark to the greenback for the first time in three years yesterday, reaching R19.29/$1 at 4pm.

This was the lowest the rand has been since May, 2020, and has fallen more than 10% since the beginning of this year, meaning the rand's buying power will diminish further.

Traders are concerned that South Africa was raising interest rates slower than the US, causing the differential between South Africa and US interest rates to drop substantially during a risk averse period, which has weakened the rand.

Anchor Capital's co-chief investment officer, Nolan Wapenaar, said the rand's sell-off was prompted by market participants taking an underweight stance, and even a short position against South Africa.

Wapenaar said these things tended to snap back when they correct, and stronger moves in the rand were certainly plausible when investors closed out their short positions.

“Nevertheless, it is clear that the rand is oversold, though weak fundamentals will keep the local currency oversold and on the back foot for a while to come.

“It is plausible that the rand will again test the Covid-19 lows of R19.30/$1, but we maintain our view that the rand will likely end the year at R17/$1, though more negativity is possible in the short term,” he said.

The rand weakened against all the major currencies and its emerging market peers like the Brazilian real, leaving analysts concluding that this weakness was based on local factors rather than global factors.

Investors have been growing concerned about the country's subdued economic growth trajectory and the implementation of intensified load shedding.

The ongoing power crisis has had a significant impact on the country's economy and productivity, resulting in supply chain disruptions, higher production costs and, consequently, elevated inflation.

Eskom is implementing rotational power cuts lasting more than 10 hours a day, and there are expectations for severe outages during winter, as some generation units will not return to service.

TreasuryONE currency strategist André Cilliers said the rand was under extreme pressure due to the ongoing energy crisis.

Cilliers also pointed to some momentum behind the sell-off, as foreigners sold almost R7bn in bonds on Wednesday.

“As they say, the trend is your friend, and we would need to see Eskom come out and give a detailed plan on how they plan to stop the electricity crisis,” Cilliers said.

“The market is worried about stagnation in the local economy, and investors do not want to invest in a country with a poor short-term outlook.”

Analysts have indicated that the unfortunate implication of the weaker rand was that it will force the South African Reserve Bank's hand when the Monetary Policy Committee meets to decide on interest rates later this month.

What was notable about the rand's weakness yesterday was that other emerging market currencies have been strengthening as the dollar has been softening.

Old Mutual Wealth investment strategist Izak Odendaal said this implied that the market was punishing South Africa, specifically for the worsening electricity situation.

Odendaal said a weaker currency would put further upwards pressure on domestic inflation, but fortunately the oil price had also been weakening.

“The extent to which rand weakness results in higher inflation depends on how businesses pass on higher import prices. This in turn depends on whether these businesses feel domestic consumers can absorb the higher costs,” Odendaal said.

“What will stop the rand decline in the short term is further rate hikes, and it now seems clear Sarb will raise rates later this month. But unfortunately, this will further weaken the economy, much as load shedding does,” he lamented.