Ray Mahlaka
3 minute read
29 Sep 2017
8:28 am

What’s behind the rand selloff?

Ray Mahlaka

It’s not an SA-politics-and-economy game this time, but the US interest rate outlook.

For once in a long time, the rand’s tumble against the US dollar over the last few days doesn’t have much to do with domestic factors.

SA’s turbulent politics and the ever worrying state of the economy have become the hallmark for the rand’s volatility against major currencies – but this time political developments in the US are at play.

Since Monday the rand’s losses against the dollar appear to have been triggered by comments by US Federal Reserve chairwoman Janet Yellen which heightened prospects of an interest rate rise in December. This signaled that a gradual interest rate cycle may be in full swing at a time when US inflation remains below the central bank’s 2% target.

Days later US President Donald Trump proposed cuts to personal income, small business, and corporate income tax rates. Market watchers called Trump’s drastic proposals as the biggest US tax overhaul in three decades.

The cocktail of possible interest rate hikes and Trump’s tax plan relief led to a US dollar rally, putting pressure on many emerging market currencies including the rand.

At the time of writing, the rand had weakened by nearly 2% since September 25 to R13.53/$ – levels last seen in July.

“We don’t think there are significant domestic issues at play for the rand. It’s really a global issue as we are seeing a sell-off in other currencies such as the Mexican peso and Brazilian real. It’s an emerging market-wide story,” said Isaah Mhlanga, the economist at Rand Merchant Bank.

The rand’s sell-off extended on Thursday, with the local unit hitting intra-day lows of R13.70/$, levels last seen in April in the aftermath of President Jacob Zuma’s decision to fire respected former finance minister Pravin Gordhan and his deputy Mcebisi Jonas in a politically-charged cabinet reshuffle.

The US dollar took a breather from its rally and the rand retreated to a narrow range of R13.52/$ to R13.60/$. Analysts expect a recovery in the local unit to be in sight.

George Glynnos, the chief economist at ETM Analytics, said the rand could retreat back to R12.50/$ to R13/$ as he doesn’t believe that the current sell-off is the start of a big reversal for the local unit which has remained remarkably resilient.

Before the US Fed’s hawkish comments, the rand strengthened in the midst of Zuma’s midnight cabinet reshuffles, jarring state malfeasance revelations involving the Gupta-family and state-owned enterprises, double junk downgrades by S&P Global Ratings and Fitch and an economy that entered a technical recession.

“I’m not in the camp that believes that this is the big reversal in the rand as the fundamentals are not talking to that. It’s about the adjustment for local and international news developments,” said Glynnos.

“Markets can overreact and overact quite strongly and one needs to be cautious about buying into this overwhelmingly bearish sentiment that is doing the rounds.”

The deciding factor for the outlook of the rand would be the ANC’s elective conference in December, which investors would be watching closely.

So are markets getting so accustomed to bad news about South Africa that the reaction by markets is becoming minimal?

Wayne McCurrie, senior portfolio manager at Ashburton Investments thinks so. “We are so used to domestic issues that even if the finance minister [Malusi Gigaba] was fired I don’t think the market would react,” he said.

Developments in the US also impacted SA’s ten-year bond yield, which rose from 8.48% on Tuesday to 8.72% (similar yields were last seen in July) on Thursday and has since retreated to 8.66%.

With the rand flirting with the R14/$ level and the ten-year bond yield nearing 9%, the appetite for SA bonds by foreign investors continues despite an increasingly uncertain political environment.

In fact, Glynnos said the big inflows in SA have been on bonds while outflows have largely been in equities. “Bonds have made up for what equities have lost. The selloff offers foreigners a fresh opportunity to take advantage of SA interest rates.”

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