Rand in trouble

The rand slumped against the US dollar again this week as the strong greenback and South Africa’s domestic factors have weighed on the currency.

Following some relative stability at the end of September, the rand weakened on Wednesday, 4 October, reaching a low of R19.41/USD.

Future Forex CEO Harry Scherzer said this is the weakest the rand has been since June this year, and it comes down to two major contributing factors. 

The first is the resurgence of the dollar, and the second is the weakening rand back home.

The resurgence of the dollar comes down to multiple things, including an expectation that the US Federal Reserve will increase interest rates, leading to a stronger dollar. 

In addition, US bond yields have started rallying, and there’s an appreciating value of around 0.37% in the dollar relative to emerging currencies in a global basket.

Scherzer said there is also some unexpected growth in America’s labour market.

However, he said, “We are not helping ourselves back at home” in that the recently released Absa Purchasing Managers’ index revealed low demand at the moment, implying that the demand for local goods has worsened. 

In addition, there are heightened concerns about inflation due to the recent petrol price increase. Scherzer said this has caused South Africa’s 2030 government bonds to weaken. 

There has also been a decline in the JSE All-share index. 

“So this combination of a weak rand and a strong dollar has caused another slump in the rand this week,” he said.

The ZAR/USD exchange rate at around 17:00 on Wednesday, 4 October.

TreasuryONE currency strategist Andre Cilliers echoed Scherzer’s explanation, saying strong US employment data reinforced the dollar’s ascendency this week.

He said the dollar is holding on to recent gains after Tuesday’s JOLTs job openings came in above expectations at 9.610 million versus market estimates of 8.800 million. 

US bond yields jumped across the curve on the news, with the 10-year yield now up at 4.83% and the 2-year yield up at 5.16%. 

He also attributed the rand’s slump to risk aversion and the strong dollar keeping the rand “on the back foot”.

He said the rand has continued to feel the pressure from the strong dollar and general risk aversion driven by interest rate hike fears. 

Markets are now pricing in an over 50% chance of the Fed hiking rates later this year again.

He said South Africa could see the currency weaken to R19.50/USD if the current rand weakness continues. 

“Bets that the SARB will have to hike further are on the rise, and Wednesday’s big hike in the petrol price is likely to raise inflation fears,” he said.