Rand on the back foot amid global equity sell-off

Cape Town - The rand started on the back foot against the US dollar on Tuesday, with the local currency under pressure from dollar strength and as President Jacob Zuma refuses to step down as head of state.

"We've seen the dollar gain some traction, and thus the ZAR together with other emerging market currencies is weaker this morning," said TreasuryOne in a snapnote.

The rand hit R12.18/$ in early morning trade, before recovering to trade 0.12% firmer than its overnight close. By 09:58 the local unit was trading at R12.11 to the greenback.

RMB currency strategist John Cairns said speculation about Zuma's imminent removal has intensified.

"His removal must surely now mostly be in the price but we would still expect a knee-jerk reaction when it transpires. Any bounce in the rand, however, would be limited if global markets were collapsing."

The dollar gained on Tuesday as equity markets across the world were bathed in a sea of red.

The aggressive 4% loss on the S&P overnight brings cumulative losses to 8% - the most aggressive Wall Street move since 2015, said Cairns.

"Losses are now just shy of the 10% that the media likes to classify as a 'crash' if it happens quickly enough.

"So far, the move is being treated as a 'correction'," said Cairns.

He said the moves in the rand and other risk currencies have been contained.

TreasuryOne dealer Andre Botha said the general rule of thumb between equity markets and emerging market currencies is that when investments are risky, and equity markets are on the up, EM currencies are buoyed by the risk-taking behaviour and vice versa.

"We have seen the rand losing some ground on the back of the sell-off but not to the extent that it would have if it were a real market panic.

"To further support this moderate weakening of the rand the US dollar only gained a little ground, which would not have been the case if there was a run on safe havens."

Botha, however, cautions that should the losses on Wall Street continue, "the current EM resistance will crumble, and we could see the rand and other EM currencies feeling the heat and start to weaken significantly as the markets will turn risk-averse".

He said all eyes will be on developments from the US, especially with no significant data out this week. 

TreasuryOne's Wichard Cilliers expects the local bourse and Europe to track Asian markets, which also came under pressure on Tuesday morning.

He said the market was worried about rising borrowing cost with yields on the rise, and what the impact will be on earnings.

"The rand is currently trading at R12.14 to the US dollar. Locally we need to see what happens with the special NEC meeting on Wednesday ahead of the State of the Nation Address on Thursday.

"On the international front we need to watch the equity markets for now."

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