Rand at a new five-year low

2014-01-27 15:36

The rand has hit a fresh five-year low as it comes under sustained pressure amid a worldwide flight from emerging markets.

The rand weakened to 11.25 against the dollar in morning trading, before regaining some ground against the greenback.

The currency, often seen as a bellwether for emerging market currencies, has been under pressure since the US Federal Reserve announced that it would trim back stimulus spending.

“The rand has now fallen by 25% against the dollar since last May,” said Shilan Shah of Capital Economics.

While South Africa has been buffeted by the same wind that has hit other emerging markets, mining strikes and the country’s fiscal problems have also made themselves felt.

South Africa has been dubbed one of the “Fragile Five” emerging economies which are struggling under a large current account deficit.

“There is clearly a danger that the rand will fall much further over the coming months,” said Shah.

The precipitous fall of the currency poses another headache for the Reserve Bank, which meets later this week.

The bank, already facing unemployment at 25% and weak growth, will have to weigh whether the weak rand poses an additional risk for inflation.

Consumer inflation is already close to the upper limit of the bank’s target band.

With South Africa importing a large portion of its goods from overseas, the rand’s weakness risks fuelling inflation further.

But market watchers think central bank intervention in the currency markets, or an interest rate hike is unlikely, for now.

Peter Attard Montalto of Nomura said: “The move is orderly, so there will likely be no intervention or emergency rate hike or similar.

“If ZAR progresses similarly to 12.0 in an orderly fashion then there also is unlikely to be any FX policy reaction.”

But currency traders have nonetheless been surprised by the precipitous decline in the rand’s value.

The currency has breezed through a series of technical resistance levels and the symbolic 11 rand to the dollar rate.

In a note to clients, Standard Bank said: “The next resistance levels sit at 11.2500, 11.3600, 11.5700, 11.6500 and 11.8900.”

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