Fragile rand recovers a bit but market is trading ‘like a rat cornered by a snake’

16 August 2018 - 12:00 By Andries Mahlangu
Illustration photo shows a two-rand coin above a South Africa flag.
Illustration photo shows a two-rand coin above a South Africa flag.
Image: REUTERS/Thomas White

The rand staged a modest recovery in mid-morning trade on Thursday‚ with sentiment around the local currency and broader emerging-market assets remaining fragile.

The magnitude of the recent slide has raised inflation concerns‚ as concerns mount that the local economy possibly contracted in the second quarter.

A contraction will mean that SA is in a technical recession‚ which is defined as two successive quarters of contraction. The scenario will punch holes in the “new dawn” narrative championed by President Cyril Ramaphosa.

The rand is still down nearly 3% against the dollar‚ heading for a third consecutive weekly loss. While sustained rand weakness breeds inflation by pushing up the cost of imported goods‚ such as fertilisers in the case of agriculture‚ exporters tend to benefit from the weakness.

At the very least‚ the weaker rand cushions the struggling local platinum and gold industry against the low dollar-denominated platinum and gold prices.

Earlier in the week‚ South African Reserve Bank deputy governor Daniel Mminele tempered expectations of a potential hike in interest rates in the near term‚ saying the bank would be guided by evidence of the building inflationary pressures.

Mminele’s comments on Monday came amid the tumult in the rand and other emerging-market currencies‚ including the Turkish lira and Indonesia’s rupiah.

In an effort to defend the value of the rupiah‚ the Bank of Indonesia hiked interest rates on Wednesday – for the fourth time in 2018 so far.

“This volatility is unlikely to improve over the next couple of days. The market is still trading like a rat cornered by a snake‚” said Standard Bank trader Warrick Butler in an e-mailed note to clients.

“We could easily see this wild currency back to [Wednesday’s] lows or highs‚ just depending on headlines and what the market still makes of the [dollar] versus emerging markets. Flows are still erratic‚ with no one seemingly keen to commit to any positioning - and who can blame them?”

The rand has suffered the collateral damage of poor sentiment towards emerging markets amid jitters over the Turkish economic crisis. The higher US interest and the dollar has also hurt the rand.

At 10.35am‚ the rand was at R14.4485 to the dollar from R14.5693‚ at R16.4471 to the euro from R16.5314‚ and at R18.3890 to the pound from R18.5046.

- BusinessLIVE

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