Rand set to weaken further – JP Morgan

Over the last five months, the rand has taken a hammering – sliding from R14.50 to R17.68 to the U.S dollar – and things are set to get even worse.

The rand is among the most volatile currencies in the world, with significant moves in response to local and global economic changes.

It started the year at R15.95/$, strengthened to under R14.50/$ in March, and weakened to over R17.00/$ by July.

The local currency is currently trading at R17.69/$, and many experts believe the rand will weaken further in the coming months.

JP Morgan’s Anezka Christovova and Sean Kelly said weak Chinese economic growth is a significant risk to South Africa.

China is the biggest consumer of commodities and can have a big impact on the commodity prices that have helped South Africa to weather the global economic storm.

Christovova and Kelly said the rand is their preferred emerging market currency to short and project that it will gradually weaken to R19/$ by September 2023.

Chantel Marx, head of external research at FNB Wealth and Investments, said the rand is oversold relative to its fair value in terms of purchasing power parity.

However, she added that the rand is naturally a weakening currency over time and that it is facing headwinds with declining commodity prices and revenue from exports.

The key driver to the current rand weakness is dollar strength.

The research team at JP Morgan said the dollar index has strengthened 10% year to date and is currently at a 50-year high.

They expect this trend to continue, driven by a hawkish Federal Reserve and strength in the U.S. economy and job market relative to other countries.

The Federal Reserve is expected to increase interest rates to 0.75% this week, which will further drive dollar strength.

The South African Reserve Bank (SARB) is also expected to raise its repo rate by 0.75% this week, with further hikes expected in late 2022 and early 2023.

David Shapiro, deputy chairman at Sasfin Securities, said the rate hikes create a negative feedback loop.

It harms the economy as consumers do not have the same discretionary income levels as developed markets.

However, the SARB is forced to increase rates to prevent the rand from weakening further, putting pressure on the economy, which leads to a weakening of the rand.

Another problem for the rand is the collapse of Eskom and load-shedding, which negatively impacts the economy.

Apart from costing the country jobs and crushing businesses, it creates a negative image of the country.

Therefore, South Africa misses out on foreign direct investment and leads to asset outflows which cause rand weakness.