The rand is on the ropes again – and it doesn’t have many punches left to throw

The rand remains one of the most liquid and heavily-traded emerging market currencies on the planet. This state of affairs is rooted in SouthAfrica’s unusual history and sharp economic divide. On one hand, South Africa has long prided itself on the depth of its financial markets, and the ease in which foreigners can sink portfolio investments into the economy and repatriate such capital. South Africa also has many trade networks within the global economy.

On the other hand, South Africa is also a developing economy, so the currency is lumped with other emerging markets, most of which have historically lacked our financial sophistication. This has made the currency a “proxy” for emerging markets and a global signal for risk aversion or risk appetite among investors. The rand also gets lumped sometimes with the likes of the Canadian or Australian dollars as a “commodity currency” despite the steady decline of the domestic mining sector.

According to the Bank for International Settlements’ last triennial survey of global forex trends in 2016, the ZAR that year was the world’s 20^th most traded currency, with an average daily turnover of $49-billion. That was down from $60-billion in 2013, but was still eight times higher than the $6-billion recorded in 1998. The economy, by the way, hardly grew at that blistering pace over that time frame. So when it comes to the volatile world of forex, South Africa punches well above its weight. (The next survey will be published later in 2019).

In short, the rand is often hostage to events far beyond the control of policymakers in Pretoria.

And so it is with the latest knock the currency took. The rand hit seven-week lows on Monday 5 August, around 14.90/dollar, as the US-China trade scrap flared up again, triggering a mad scramble on trading screens. Bond yields also rose several basis points.

The rand has hardly been alone. Global stocks fell for a sixth day on Monday after US President Donald Trump slapped 10% tariffs on $300-billion worth of Chinese goods – a move that markets, which should by now have come to expect the unexpected from the White House, did not see coming. The Chinese yuan – which is surely a barometer – fell past the key 7.0/dollar level, dragging other Asian currencies down with it.

So-called safe havens have benefited. Long-term Dutch bond yields went into negative territory for the first time, while spot gold hit its highest price in more than six years: above $1,456 an ounce. But South Africa no longer accounts for the bulk of the world’s gold production, so the “commodity currency” classification is being blithely ignored.

This brings us back to the rand. When the dust settles from the latest trade punch-up, the Chinese yuan among others should be able to recover, unless policymakers in Beijing want to boost exports through a bit of currency softness. In June, China’s exchange reserves rose $18.23-billion to $3.119- trillion. South Africa’s net foreign reserves by contrast in June stood at $43.940-billion. So in a single month, China adds almost half of our total to its reserves. China probably spends as much on chopsticks every day.

Using foreign reserves – which can enable a central bank to intervene in forex markets to defend the value of its own currency – is not really an option open to Pretoria. And there are not many other viable options on offer either.

The rand may be partly hostage to global trends on account of its liquidity and status as a proxy, but its performance is also a reflection of South Africa’s domestic economy, which has almost nothing going for it at the moment to support the currency. Growth is anaemic at best, confidence levels are slow, unemployment is sky-high, the government seemingly has no plan, and our descent into junk status could well be complete soon if Moody’s pulls the trigger. That will spark capital outflows, and the extent has probably not been priced into the markets yet because no one can really say how much cash will gush out.

“I think the currency will grind weaker, given there is not much government can do to respond to the crisis,” said Peter Attard Montalto, Head of Capital Markets Research at Intellidex.

The rand does have one thing going for it – it is looking oversold at the moment. George Glynos, head of research and analytics at ETM Analytics, noted that various momentum indicators tracked by analysts showed the rand, which has lost about 5% over the past week, was deeply in oversold territory. That often heralds a rebound, just as “overbought” signals often herald a correction.

If it doesn’t regain its footing in such a situation, with technical indicators working in its favour, things could go pear-shaped. Glynos told Business Maverick the next big technical level was 15.170/dollar, a level it hit in early June before clawing back some lost ground.

If that level gets broken, Glynos said: “We open up the door for a substantially weaker rand. The next big target would be 15.69/dollar, the previous low from September last year. Beyond that, you start knocking on the door of 16 and then beyond that, north of 17.0/dollar.”

The only bright spot in all of this is that because growth is so sluggish and demand so muted, inflation pressure is likely to remain moderate, even in the face of a new bout of rand weakness. That just underscores the state of the economy: it is so woeful that it can contain inflation. But if the rand sank to, say, 17/dollar, then inflation would hardly be immune.

Expect plenty of turbulence in the months ahead. BM