Rand falls as Brexit delay fuels global risk
The rand fell on Monday to its lowest level against the dollar in almost a month as traders braced for more volatility after British Prime Minister Theresa May called off a parliamentary vote on her Brexit strategy, setting the scene for more turmoil in global markets.
A messy Brexit could hamper economic growth in the UK and the rest of the EU, which is still SA’s biggest trading partner, despite the rising importance of countries such as China and India. This could weigh on the rand and increase the likelihood of the Reserve Bank hiking interest rates.
Violent protests in France, fear of a trade war between the US and China and poor economic data from Asia added to a sell-off of risky assets.
Sentiment was also hit by news of the unexpected resignation of India’s central bank governor after a clash with the government.
Implied one-week volatility in the rand against the dollar jumped above 20% to the highest since mid-September, according to Bloomberg data, which also showed that the currency’s 1.39% drop against the greenback was the biggest among 31 currencies.
The rand tends to move disproportionately when there is turmoil in financial markets as it is one of the most liquid of the emerging-market currencies and often sold to help cut overall exposure to riskier assets.
At 6pm, the rand had dropped 1.95% to R14.4545/$, after earlier weakening by as much as 1.99%, the weakest since November 13.
Against the euro, it had fallen 1.8% to R16.4349/€ and it was 0.44% weaker against the pound at R18.0858/£. The pound had fallen 1.7% against the dollar to its weakest level since April 2017.
May’s decision to pause the Brexit vote would be viewed poorly by the market, said Herenya Capital Advisors founder Petri Redlinghuys, citing an uncertain environment faced by companies trying to find ways to mitigate the effects of the UK’s departure from the EU, set for March 29 2019.
"We are seeing a realisation that things in Europe are getting messy, and economic growth is looking extremely fragile," Redlinghuys said.
While the decision to put off the parliamentary vote on the terms of the agreement that May negotiated with the EU on Britain’s departure from the bloc may make a second referendum more likely, it also increases the risk of the country crashing out without a deal, leading to political and economic chaos.
Renewed volatility in the rand could be seen as vindication for the Reserve Bank raising interest rates in November for the first time in more than two years. The Bank warned then that the relative calm in emerging-market currencies might not last long.
Prolonged currency weakness that pushes up the cost of imported goods, including fuel, could prompt the central bank to act again as it seeks to move inflation closer to the midpoint of its 3%-6% target range.
Also weighing on the rand was the crisis at Eskom, leading to the return of load shedding, Investec economist Annabel Bishop said in a research note.
If power cuts persisted well into the first quarter of 2019 and reached the sort of levels that were experienced early in 2008, it could hit sectors such as mining and manufacturing hard, she said. "Overall, if load shedding is as persistent and extreme as it was in 2008, that could see growth cut by as much as a third to a half.
"This is not the expected case, but rather the risk to SA’s economic growth posed by Eskom," along with the possibility of SA losing its last remaining investment grade, she said
On Monday afternoon, the British prime minister confirmed speculation by media, including Bloomberg and the Financial Times, that she had delayed the parliamentary vote on her Brexit plan after admitting that it "would be rejected by a significant margin".