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Tough week for rand and it could get worse - analysts

Jul 26 2019 15:17
Lameez Omarjee, Fin24

The rand this week weakened to above R14/$, mainly on the back of the announcement of an Eskom bailout and geopolitical events, and an analyst has warned it could breach R15/$ in the long term.

The local unit started its decline earlier this week, after Finance Minister Tito Mboweni on Tuesday tabled a special appropriations bill for Eskom to receive R59bn from government over the next two years. The currency declined by 0.6% to R13.94 at the time, Bloomberg reported.

The rand has struggled to make meaningful recoveries since then and weakened as much as 1.5% on Thursday to close at R14.08/$ - following a report by Moody's, warning that the Eskom bailout would be credit negative.

A dovish statement by the European Central Bank also contributed to the rand's weakness. "The euro rapidly lost ground against the dollar and the rand quickly followed suit," Treasury partner at Peregrine Treasury Solutions, Bianca Botes explained in a market report.

On Friday morning the rand opened at R14.07/$, and by 14:15 was trading 0.73% weaker at R14.17 to the greenback. Following the release of US GDP data at 14:30, the rand weakened to trade almost a percent weaker at R14.20.

US GDP surprised on the upside at 2.1%, higher than the 1.8% that was expected. This pushed the dollar on the front foot, TreasuryONE noted in a market snapshot.

Mpho Tsebe, economist at RMB Global Markets research said that a lower-than-expected GDP figure would result in expectations of a rate cut being moderated. "[This] will be dollar positive but negative for the rand and other emergency currencies."

Fed rate cut

The next major event to affect the currency would be the US Federal Reserve's rate decision expected next week, Botes said.  

A rate cut has been priced in, but analysts will be checking the tone of the Fed announcement as well as the depth of the cut, Botes explained.

A cut in excess of 25 basis points would see the rand strengthen below R13.80/$ and possibly have stronger trading leg in the short term, however things are expected to get tough on emerging markets in the medium to long term, Botes warned.

"While many agree that the current levels remain unsustainable, the rand continues on a stable footing against major currencies in the short term, while our projections for the longer term indicate a move towards R15.00," Botes said.

us federal reserve  |  rand  |  markets  |  currencies
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