Emerging-market chaos keeps rand under pressure
Contagion in emerging markets due to Turkey and Argentina’s fiscal situation keeps the rand on the back foot
The rand was off its weakest levels against the dollar on Wednesday afternoon but remained under pressure following the news that the economy slipped into a technical recession in the second quarter — for the first time since 2009.
Tuesday’s GDP data confirmed what many may have been thinking, "and that is that we are already in a recessionary type environment", said IG SA senior analyst Shaun Murison, who said that despite the local circumstances of a weak economy, rising inflation and political uncertainty, there is generally negative sentiment towards emerging markets as a whole.
"The economic crises in Turkey and Argentina are causing contagion-type fears, while the ongoing trade war between China and the US is threatening global economic growth," he said.
Emerging-market currencies generally remain on the back foot in anticipation of further tariffs by the US on Chinese goods.
Safe-haven flows continued to support the dollar for a fifth consecutive session as the "public comment period" for the US’s proposed tariffs on more than $200bn worth of Chinese goods is due to end tomorrow, Oanda analysts said.
On Wednesday, Bank of America Merrill Lynch increased its fair-value assessment of the rand to R15/$ from a previous R14. Despite the rand weakness, the Reserve Bank is expected to keep rates on hold. However, that could change if the rand remains consistently above R15/$, Bank of America Merrill Lynch said.
The Turkish lira made a marginal comeback against the dollar on Wednesday, but the Mexican peso and Russian rouble remained under pressure.
At 3pm, the rand was at R15.4801 to the dollar from R15.3483, after earlier falling to a weakest intra-day level of R15.697. It was at R17.9346 to the euro from R17.7803 and at R19.8615 to the pound from R19.7267. The euro was at $1.1585 from $1.1583.
Local bond yields have spiked in line with the falling rand but analysts remain wary of calling present levels a good buying opportunity. The recession has raised concern about whether SA will be able to balance its fiscal books, as required by the major credit-ratings agencies. The contents of the medium-term budget policy statement, due on October 24, will be crucial for the country.
"Weak growth implies risks of further fiscal slippage relative to our deficit estimate of 3.8% of GDP in 2018 and the Treasury’s target of 3.6% of GDP," Bank of America Merrill Lynch said. It expects no ratings changes from the November reviews but further revenue shortfalls, increasing populist pressures, and a need for state-owned enterprise (SOE) bailouts could raise downgrade risks after the February budget.
The R186 was last bid at 9.24% from 9.22%.