The rand came dangerously close to R14 to a dollar on Tuesday, as US President Donald Trump threatened an all-out trade war with China by announcing the possibility of tariffs on an additional $200 billion worth of Chinese goods.
This came days after Beijing announced tariffs on $50 billion worth of US goods in a tit-for-tat response to those finalised by Trump on Friday. Markets sold off across the world. The Dow Jones industrial average turned negative for the year amid its longest losing streak since March 2017. The dollar hit an 11-month high.
Investors are worried that global growth will falter amid a trade war, and are moving into the safety of the dollar and US bonds. They are selling anything deemed riskier – and emerging market investments are at the top of the list. By Wednesday morning, the rand was trading at R13.68 to a dollar. It has lost 18% of its value in less than a month.
Apart from the trade jitters, the rand also been hit by rising US interest rates. The rand, which traditionally offers a fat interest rate, looks more unappealing as dollar rates rise. There are also concerns about the SA economy, which tanked in the first quarter.
“The rand held up much better than other emerging market currencies in the first part of 2018, so it has been disproportionately hit by the current sell-off,” says Johann Els, head of economic research at Old Mutual.
While some analysts believe the new draft mining charter, which was launched last week,added to the pressure on the rand, Els doesn’t think that is the case. “The charter is seen as more positive that the previous version [which was released last year].”
Should the rand stay around current levels for the next weeks, this is how it will impact your pocket:
Fuel is SA’s biggest import product. If the rand weakens, oil – which is priced in dollar – is immediately more expensive.
Fortunately for SA, oil prices have started to cool down in the past week after a strong rally in recent months, so the impact of the rand fall will be cushioned somewhat.
Still, as it stands, according to government calculations, petrol and diesel prices will be hiked by at least 28c in the first week of July – primarily due to the weak rand.
Rand flirting with 14 to USD..this is a big possibility, ZAR moves in 20 cents gaps occasionally. This would be super negative and inflationary. Fuel price will go up again at this rate...2% GDP target might be tough to get...— Inkunzi Wealth Group (@OwenNkomo) June 19, 2018
While higher fuel prices will have an immediate knock-on impact on the cost of delivering all goods and food, resulting in higher prices, the rand/dollar price has a direct impact on grain prices as well.
South Africa imports between 50% to 60% of its wheat needs annually, and the weaker rand makes imported wheat more expensive. This should lead to higher bread prices.
For maize, South Africa currently has a surplus, and therefore South African exporters have to compete in the international markets. Because the dollar has strengthened against the rand, producers are getting more for their exports, which means the local maize has to keep up. Accordingly, local buyers will have to pay more to get their share of SA maize.
According to Luan van der Walt, an economist at Grain SA, it usually takes about three months for these higher prices to feed through to food producers and consumers.
“The impact of higher fuel prices on the cost of food may be felt sooner.”
Maize prices are some 18% higher than last year this time – when a record crop yield a large supply. But wheat prices are 13% lower.
The prices of electronic equipment are among the most affected by a weaker rand, says Els.
But it could be that prices won’t be hiked by the same margin as the rand slump. It is likely that retailers may not have yet passed on the full saving of the stronger rand earlier this year, he adds.
If the weak rand pushes up inflation, this could necessitate interest rate hikes, central bank deputy governor Kuben Naidoo warned on Tuesday,
“If we do think there is a risk of second-round effects, we will have to act,” he said. The market is pricing in a 66% chance of a 50-basis point rate hike before the end of the year.
But the latest inflation numbers, released on Wednesday morning, showed that May CPI slowed to 4.4%, from 4.5% in April. And that's despite the VAT hike in April. This could help to stave off a repo rate hike on July 19.
Els does not believe that its current levels will form a “new normal” for the rand.
In fact, Els expects that the rand should reach R12.50 to a dollar by the end of the year.
He believes the economy will strengthen in the next few months and that sentiment should improve ahead of President Cyril Ramaphosa’s investment conference, planned for October.
“Many things need to happen before the conference – among others, the mining charter and the land issue will have to be resolved.”
Also, he thinks the rand should start strengthening if fears about a global trade war start abating.
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