Rand’s record low concerns experts – but there is hope

The rand dropped to a record low against the dollar following the South African Reserve Bank’s (SARB) implementation of a 50 basis point interest rate increase – an unexpected market reaction following the SARB’s hawkish approach.

The rand weakened to its worst level ever at just above R19.83/USD on Thursday. It had been trading at above R19/USD since the US ambassador accused South Africa of supplying arms to Russia.

Normally, interest rate hikes during high inflation periods are welcomed by the market, which is reflected in a strengthening of the local currency. However, the SARB’s announcement seemed to have had the opposite effect on the rand.

Efficient Group chief economist Dawie Roodt told eNCA that he is concerned not only about the rand’s weakness but also the weakening of the capital market following the SARB’s interest rate hike.

“If you look at the longer-dated bonds, for example, they weakened by something like 20 points or so,” he said. “Now that is very, very bad news when it comes to fiscal policy.”

Roodt pointed to two possible explanations for the weakening of the rand and the capital market.

The first explanation points to SARB governor Lesetja Kganyago, who expressed concern for the country at Thursday’s Monetary Policy Committee (MPC) meeting.

Kganyago’s concern could have “spooked” the markets, as he said there are likely to be more upside risks to inflation in the coming months

The second explanation is that the financial markets “are simply not believing the Reserve Bank anymore” and do not believe that the SARB can lower inflation.

Regardless of the reason, Roodt referred to the market’s reaction as an “overreaction”.

He warned that should the current levels of rand weakness be maintained, it will create a “negative feedback loop”.

In other words, if the rand remains this weak, inflation will rise, and the SARB will have to keep hiking interest rates, weakening the rand further.

TreasuryONE currency strategist Andre Cilliers said the short-term outlook for the rand is extremely negative, and, with dollar inflows lagging outflows, “a move to the R20.00 level is a distinct possibility”. 

Cilliers said load-shedding also remains a concern, as it poses an upside risk to inflation and a downside risk to economic growth. This, in turn, makes further rate hikes more likely. 

In addition, the strengthening of the dollar on the back of strong US labour data and on data showing that Germany was in a recession does not bode well for the rand. 

However, FNB Wealth and Investments’ Wayne McCurrie has a more positive outlook for the rand in the medium term.

McCurrie said that, despite the rand’s plummet in the past few weeks, the fair value for the currency is still below R17/USD.

Historically, every time the rand has collapsed, it has strengthened back to fair value. 

There is, therefore, some hope that South Africa could avoid the negative feedback loop and see a strengthening of the rand.