Rand takes worst beating since credit downgrades

May 18 2017 19:58
Lameez Omarjee

Johannesburg – The rand hasn’t taken as hard a beating since the credit downgrade, partly because its strength is not solely dependent on domestic developments. Global factors have proven to be a driver of its performance, said economist Dr Azar Jammine.

The chief economist at Econometrix was speaking at a seminar on junk status in Sandton on Thursday.

He explained that the impact of the downgrade had already been priced into the currency. Further, the currency is also still “quite cheap”, he said. “The rand is nowhere near as expensive as it was in 2011, or between 2004 and 2007. But it is not as cheap as it was last year.”

This presents opportunities for exporters to do well, explained Jammine. For the first time in six years, the country has had more exports than imports, he said.

The rand’s cheapness has helped benefit foreign tourism. Tourism has recovered after declining 6.8% in 2015 due to visa regulations enforced under the watch of Malusi Gigaba, former home affairs and now finance minister. Overseas tourist volumes declined 2% in 2015.

Since Gigaba rescinded the regulations, tourism has been upbeat with an 18% growth in overseas tourists, explained Jammine.

Rand movements

The rand’s depreciation since 2011 was mainly driven by the decline in commodity prices and expectations that the US would tighten its monetary policy and increase interest rates. This saw an outflow from emerging markets in favour of the US, explained Jammine.

Countries like Brazil, Russia and Turkey similarly were hammered, he added.

In 2016 there was more optimism as the commodity slump has “bottomed out” and there has been flow back towards emerging markets. However, local political factors also had a role to play on the rand’s strength.

READ:7 reasons why the rand remains robust

Before the Cabinet reshuffle, the rand was the third-best performing emerging market currency, trading at an average of R12.44/$. On March 27, when former finance minister Pravin Gordhan had been recalled from an international investor roadshow, the rand took a dive to R13.26/$ and became one of the worst performing currencies in the world, said Jammine. On that day, before the recall, the rand was trading at R12.31/$.

Trump effect

Up until events this week, the Trump effect had been positive. However, expected fiscal problems in the US following Trump's calls for tax cuts and more infrastructure spend, could see the Federal Reserve Bank raise rates.  

READ: Rand reels from Trump turmoil

Fin24 reported that the rand had weakened more than 2.5% to R13.50/$ due to political developments in the US. other emerging markets also took strain, according to TreasuryOne.

By late afternoon, the local unit recovered some ground lost - from the high of R13.58 to currently trade at R13.41.

"Also part of the problem in the emerging market currency space today, is the corruption scandal that has emerged in Brazil," said TreasuryOne in an afternoon note to clients.

There are allegations that the current president Michel Temer approved bribes to buy a colleague's "silence".

This has sparked a massive selloff of the real and the Brazilian stock market.

"In the meantime the recovery in the ZAR can be attributed to the positive open we have seen in the US equity markets. ZAR pretty much at the mercy of the international headlines currently," said TreasuryOne.

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rand  |  interest rates  |  inflation  |  sa economy



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