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Rand threatens to break through R14/$ amid emerging market rout

Jun 28 2018 11:06

The rand threatened to break through R14 to the dollar on Thursday as the US dollar continued to draw strength from struggling world economies.

By 10:15 the local unit was trading 0.13% weaker at R13.87 against the US unit after hitting R13.9975/$ earlier on Thursday.

"Emerging markets across the board are very weak and the dollar just continues to surge. For now the trend remains your friend," commented TreasuryONE lead dealer Wichard Cilliers. 

The rand continued to be the worst performing currency among its emerging market peers as fresh tensions between the US and China damaged investor sentiment.

On Wednesday the local unit lost 2.31%, 1.51% and 1.5% against the greenback, the euro and the pound sterling – to the weakest levels since late November 2017.

This time around, the rout was driven by US President Trump’s top economic advisor, Larry Kudlow, who said the president’s suggestion that he would not seek a hard line against China did not mean a retreat from the US’s approach on trade. So the protectionist stance is on, said RMB economist Isaah Mhlanga.

Mhlanga added that the weakness was compounded by the unions' snub of Eskom's new 5% wage offer and month-end, quarter-end and half-year momentum-driven US dollar-buying.

"A breakthrough at 13.93 opens room for 14.00 from this morning’s opening level of 13.87," said Mhlanga.

TreasuryONE's Andre Botha ascribed a lot of the US dollar strength to the other world economies struggling, while the US economy chugs along merrily.

However, he also noted confusion in the market due to indecisiveness from the US, "changing its stance on tariffs from aggressive one day to softer the next".

"Confusion and uncertainty, as we know, is the bane of EM currencies," said Botha, adding that quite significant portfolio outflows from the SA market in the past few days also assisted the rand's weaker run.

"With sentiment still on the negative side, we expect the rand to continue to weaken until some clarity is evident is the trade war saga," he added.

Today will be a bumpy ride as markets prepare for a busy data day, kicking off with data from Europe including business sentiment, while South Africa releases PPI figures, cautioned Peregrine's Bianca Botes.

"This afternoon we shift our focus to the US GDP and jobless claims. Strong data from the US could reignite the sell-off of emerging markets and see the rand continue down its slippery slope.

"The local currency started Thursday at R13.85/$ with bias to move towards R14.00," she said.

As things stand, the rand looks set to conclude the quarter with losses at 15%, said Jameel Ahmad, global head of currency strategy & market research at FXTM.

"The dramatic decline in emerging market sentiment means that the currency is now down by 10% year-to-date, and has completely reversed the rally that was seen when Cyril Ramaphosa became SA president."

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