Worst not yet over for the rand

Aside from being significantly undervalued, several factors are influencing the rand’s current weakness and will continue to put pressure on the local currency throughout August.

This is according to RMB’s Matete Thulare, who told Moneyweb Now that the rand is facing several global and local challenges.

Thulare’s analysis comes in light of the latest update to The Economist’s Big Mac index, which revealed that the rand is, theoretically, over 50% undervalued and should be trading at R8.94 to the US dollar.

Following a tumultuous start to the year, the rand experienced a strong July but recently came under renewed pressure after rating agency Fitch downgraded the US government’s credit rating.

This downgrade saw the dollar strengthen, while the rand weakened almost 1.4% and was trading at its lowest level in nearly three weeks on Wednesday, 2 August.

The rand has traded above R18/USD and is down about 2% since the start of August.

The local currency took another hit on Friday, 5 August, when US employment data was released, said Thulare.

Despite the US reporting softer-than-expected employment numbers and one of the lowest readings in the decade, the data saw the dollar strengthen, and the rand lose around 1.1% on the day.

In addition, he said the anticipation ahead of US inflation data – set to be released on Thursday, 10 August – has kept the rand and its emerging market peers under pressure.

Another hit came over the weekend when the US Federal Reserve’s Michelle Bowman said the Fed may have to raise rates further to restore price stability fully. 

This comment saw sentiment from a dollar index perspective rise, strengthening the US currency. 

From a geopolitical perspective, drone attacks in the Black Sea that are likely to escalate the war tensions between Russia and Ukraine have strengthened US sentiment. This has also given the dollar the upper hand due to its ‘safe haven’ status.

Thulare said China’s slower-than-expected economic recovery, further revealed in data released on Tuesday, has also negatively impacted the rand.

He identified several upcoming events that will be critical in the rand performance over the next month – 

  • South Africa’s manufacturing and mining data for June are set to be released on Thursday, 10 August.
  • US CPI data is also set to be released on Thursday, which could indicate whether the Fed will opt for another interest rate hike come September.
  • The BRICS summit at the end of August will also draw the market’s attention to emerging market currencies.

“Overall, the risk sentiment towards what’s happening in the global environment is still negative, and obviously, the dollar will still gain on the back of this,” he said.