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Cape Town - The rand staged a significant comeback on Wednesday after breaching R13.60/$ in the previous session, as pressure on emerging markets mounted.
By 15:05 the local unit was trading at R13.31 to the US dollar, 1.85% firmer than its overnight close in New York. It earlier reached a session low of R13.28 to the greenback.
The rand opened at R13.51/$ on Wednesday morning, with early Asian trade seeing a sharp reversal of the move that extended to R13.62 on Tuesday.
"The rand clearly has the potential to move aggressively on sentiment," said RMB currency strategist John Cairns.
He said rand losses on Tuesday initially matched those of the Turkish lira. "The story at the time was that the threat of higher core rates was generating sales out of 'exposed' currencies: South Africa and Turkey being in the firing line because of their respective local political situations."
Cairns said back in 2013, the rand was fingered as one of the “Fragile 5” emerging-market currencies - "it is exposed to Fed policy tightening because of the large current account deficit. This deficit problem has been greatly improved but the hope that this would take the rand off the target list seems to have been vain: politics has now seemingly replaced economics".
On Wednesday afternoon, the local unit moved firmer along with other risk assets after Federal Reserve chairperson Janet Yellen said the US economy should continue to expand over the next few years, allowing the central bank to keep raising interest rates, while also stressing the Fed is monitoring too-low inflation.
This has caused emerging markets to make a comeback, with the USDZAR currently trading at R13.30, said TreasuryOne.
Silver lining
Cairns said foreign investors seem to see the rand weakness as an opportunity. "While sentiment locally has become very bearish, foreigners have been picking up bonds aggressively."
He also said some will see the rand weakness as a catch-up with the fundamentals, the political and rating deterioration in the first half of the year in particular.
"We don’t, however, put much store in the argument that the weakness reflects 'looming' interest rate cuts."
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