Cape Town – South Africans should prepare themselves for more drastic shifts in the rand as the rating downgrade looms, an analyst warned after the rand went from R14.23 to R14.72 on Tuesday, devaluing the currency by up to 2.5%.
While global risk aversion and a spike in domestic corporate import demand after the public holiday on Monday was the main cause, analyst Adam Phillips of Umkhulu Consulting warned on Wednesday that the fluctuation would be normal going forward.
Phillips believes the rand, which was the worst performing emerging markets currency on Tuesday, will return to R15/$ in May. If that sounds bearish, Nomura emerging market economist Peter Montalto forecasts that the rand will hit R19/$ by the end of 2016. By 07:45 on Wednesday, the rand was trading at R14.67.
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“I think everyone was getting to the stage where it was safe to come out and play (in the rand currency market),” Phillips said. “Well yesterday (Tuesday) and this morning shows why it is a second division emerging market currency.
“It did not take long before importers were in buying yesterday after the weekend, although it took longer for commodity prices to react along with oil.
“In a reminder of the headless chicken type situation we saw in January, everything got sold off as the dollar recovered some ground."
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“Some might argue that we had strengthened too far, too quickly. For me it was SA Reserve Bank (Sarb) governor Lesetja Kganyago who showed his concern that outflows could increase if a downgrading happens," said Phillips.
Kganyago said on Tuesday that the impact of a ratings downgrade could lead to increased capital outflows.
"The impact of a further ratings downgrade on the South African economy and financial system could manifest in the form of capital outflows (and) potential spillovers to rand-denominated ... government debt," the Sarb said.
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“One could argue that the price behaviour of the rand is correct when one looks at a currency that is on the edge of a downgrading, where you get small movements in favour of the currency and then a big fall on one day," said Phillips.
“Certainly if we do get downgraded we will have to expect such movements more regularly,” he said.
“Kganyago’s concerns are there to be read and that is why I think unfortunately that the rand will stick out like a sore thumb this month. Technically we could see it trade closer to R15/$.”