The rand is trading on the back foot, given recent geopolitical developments. This has seen the US dollar soaring, and resulted in negative emerging market sentiment.
The rand opened at R12.77/$ on Monday morning, already having been weaker during early Asian trade, according to a market update from NKC Economics.
Last week it closed 1.4% weaker to the dollar at R12.72/$, its lowest level in six months. NKC expects the currency to trade within a range of R12.60/$ and R12.85/$.
By 12:18 the local unit was trading 0.33% weaker at R12.81 to the greenback after flirting with the R12.90/$ level earlier in the session.Increasing negative emerging market sentiment, poor South African economic data and a possible contraction in GDP data are catching up with the currency, NKC explained.
Bianca Botes, corporate treasury manager at Peregrine Treasury Solutions, said dollar strength could be attributed to the "trade war" between China and the US having been put on hold.
"Political uncertainty from Europe is contributing to the pressure. However, the weakening of the rand is mostly due to a stronger dollar, and little support is being offered by emerging market data," she explained.
RMB economist Isaah Mhlanga unpacked the state of relations between the US and China in a market update. "One of the three big global risks – a global trade war – led by the US and China, seems to have been averted, as the US and China agree to stop imposing tariffs on each other.
"China is reported to have proposed to cut the US trade deficit by $200bn by raising its imports of food and energy products from the US. Although no formal agreement has been reached, this will cheer up global equities, potentially numbing last week’s risk-off trade."
Rand in the firing line
Mhlanga said the strengthening dollar trend pointed to the Federal Reserve Bank holding onto its course for three to four rate hikes this year.
"Against this backdrop, the weakening trend in emerging market currencies should not be surprising.
"South Africa is among the worst five countries in terms of its financing needs," said Mhlanga. "As a result, the rand will always be in the firing line, along with these countries, as dollar bulls remain confident and global capital reassesses the health of emerging markets."
Mhlanga explained that an improved political environment locally, as well as the latest public sector wage agreement settling for above-inflation increases, had not filtered through to economic activity fast enough to improve confidence measures. This is why the rand is vulnerable whenever emerging markets "fall out of favour", he said.
Mhlanga shared views that the Reserve Bank’s Monetary Policy Committee (MPC), which will be meeting this week, will keep rates unchanged at 6.5%. This is affected by rising oil prices, now at $80/bbl, and a poor Consumer Price Index (inflation) outlook, which will be carrying the effects of the higher VAT rate.
"We expect headline and core inflation to print 4.7% y/y and 4.5% y/y," he said.
TreasuryONE also expects the MPC to keep rates on hold.
Additionally, ratings agency S&P will be releasing its ratings review this week. A stable MPC decision and an improved outlook by S&P may be good news for the rand, but it won’t be enough to offset the recovery in the dollar, according to TreasuryONE.
"The short USD (dollar) position continues to unwind and has further to run before investors turn more confident in shorting the USD."
Treasury expects the rand-dollar rate to trade even higher during the course of the week, and it could reach R13/$.
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