Rand could weaken to R19/$ amid fears of global recession | Fin24
 
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Rand could weaken to R19/$ amid fears of global recession

Mar 23 2020 16:13
Lameez Omarjee

The rand, which has been trading at historic lows, could possibly weaken below R19$ in the near term, according to analysts.

The local unit breached the R17/$ mark last week, since the Covid-19 virus triggered a sell-off placing global markets in turmoil. 

The rand opened at R17.53/$ on Monday and was testing the R18/$ mark during the session, having reached as low as R17.89. By 15:35 it was trading at R17.67/$.

Its weakest intraday level yet was R17.91/$ back in 2016, which was caused by a sharp fall in the Chinese market, as Fin24 previously reported.

Wichard Cilliers, chief of dealing at TreasuryONE, warned that the rand could possibly trade as low as R19/$, in a risk sell-off. "If the international market doesn't want emerging market risk, they will sell that risk at any price," he said. The rand's emerging market peers – the Russian ruble and the Mexican peso are also taking a dive as they are exposed to the volatile oil price market, he added.

Commenting on the rand's movements, treasury partner at Peregrine Treasury Solutions, Bianca Botes, said that the local unit's losses come down to the economic impact of shutdowns, continuous sell-off in markets and how long the viral outbreak will last. "From a technical level perspective it seems possible that the rand could even eventually fall as low as R18.95/$ as a result of the current market sell-off," Botes warned.

"In the short-term, we should see quite a bit of resistance coming in at the R18.20/$ level, before the rand potentially breaks through R18.95/$," Botes added.

Investec chief economist Annabel Bishop's projections show further weakness for the rand in the second quarter of the year, as the global economy sees a heightened risk of recession.

Little certainty

Investec projections for a "lite" scenario show the rand could trade at an average of R19.50 to the greenback during the second quarter of the year, before hitting as low as R22/$ in the third quarter and then moderate to levels around R16/$ by the fourth quarter of 2021. In this scenario, a downgrade to junk status by Moody's is accounted for.

In a severe scenario, which takes into account a global recession and global financial crisis, we would see the rand average R22 to the greenback by the second quarter of the year, before worsening to R24/$ by the third quarter. It is expected to moderate to an average of R16.50/$ by the fourth quarter of 2021.

"It should be noted that there is very little certainty in the midst of a severe pandemic where many countries are requesting individuals to stay at home, a number of economies wind down to essential services and contracting GDP," said Bishop.

Various central banks have been put in place stimulus measures but markets have remained "nervous" Cilliers said.

Last week US Fed cut its interest rates to near zero and launched a $700 billion quantitative easing programme. Domestically the SA Reserve Bank (SARB) cut interest rates by 100 basis points to 5.25% and introduced measures to improve liquidity in markets. Bishop said the liquidity measures helped bonds as yields eased, but not the rand.

"The SARB's drop in interest rates and the easing of liquidity in the market is aimed at fuelling the ailing economy. However, it’s important to understand that the South African economy was in a recession prior to the coronavirus outbreak, and that local economy will continue to buckle even more under the outbreak," Botes said.

"Unfortunately, the pandemic isn't something that liquidity easing and a drop in interest rates is going to solve – these are simply tools to help the country navigate a difficult road ahead," Botes said. These measures are an attempt to prevent the economy from declining more than already anticipated as opposed to stimulating economic growth, she explained.

18-month recovery

Botes said it is expected for the SA economy to remain in a recession, and it could possibly take 18 months for it to recover from the Covid-19 crisis.

The impact of individuals social-distancing and self-isolating to curb the spread of the Covid-19 virus is seeing businesses shut down. Government may have to step in to provide funding to sustain businesses and poorer households; while still grappling with a budget deficit and massive shortfalls in tax revenue.

"Government will certainly look at providing some form of financial aid to smaller businesses and to families struck by poverty and unemployment made more acute by the current situation," Botes said.

Last week President Cyril Ramaphosa said that the pandemic would have a lasting impact and that Cabinet was finalising a package of interventions to mitigate its impact on the economy. Earlier on Monday National Treasury out a call to citizens requesting their input on how best public finances can be spent to deal with the coronavirus, News24 reported. Botes said government may have to channel spending from other areas in order to fight the outbreak.

With the count of infections now over 400, the president is expected to address the nation this evening on further steps to address the crisis.

rand  |  markets  |  covid-19  |  currencies  |  stocks
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