The rand is bleeding – it is at its weakest level since 2017 against the dollar. It lost 5% in less than two days, reaching a level of R13.2875 on Thursday. In less than a month, it has lost a full rand against the dollar. On Friday afternoon, it was trading at R13.08 to a dollar, R17.53 to a pound and R15.37 to a euro.
Here are the reasons for its current meltdown:
Emerging Market currencies on the back foot:-Argentina got a $50bn loan from the IMF-Turkey hiking their interest rates for the umpteenth time-Brazil trying to defend the Real after the country had a very damaging truck driver strike-SA seeing no growth and high inflation pic.twitter.com/fAwHaMnUVL— Johann Biermann ???? (@JohannBiermann1) June 8, 2018
Investors across the world are getting nervous that the world economy could slow down, partly because of the threat of a global trade war, fuelled by trade duties introduced by US president Donald Trump.
In addition, Europe is raising concerns. Economic growth has slowed across Europe, and the political turmoil in Italy could have far-reaching implications for the EU.
Nervousness has prompted global investors to dump anything that could potentially be risky, and as usual emerging markets are targeted first. Last month they pulled $12.3 billion from emerging markets - the largest outflow since 2016.
Domestic issues in many emerging markets are also souring sentiment. In Brazil, a massive strike by truck drivers over high fuel costs is hurting the economy, and nervousness is growing ahead of October elections in that country, which could see a swing to political extremist parties. On Thursday, Brazilian’s markets plummeted by more than 7% at one point. Argentina, which received a massive emergency loan from the IMF, is mired in a massive economic crisis.
#Turkey and #Brazil both stepped up efforts to protect their currencies from speculative attacks. While Turkey raises rates more than predicted, sending lira soaring, Brazil intervention failed. Real now down 16% this quarter. https://t.co/Yal0qnKTru pic.twitter.com/xub0sSc7JG— Holger Zschaepitz (@Schuldensuehner) June 7, 2018
There are also concerns about South East Asia, where governments are introducing fuel subsidies and price controls to try to bring inflation under control and win the favour of the electorates.
Interest rates are key to currencies. The more interest you earn on a currency, the more appealing it becomes for investors.
The rand used to offer a fat interest rate for overseas investors from the US and Europe, where rates are closed to zero. But this is changing. The US is hiking its rates, and another increase is expected next week.
This is hurting emerging market currencies, and in recent days many countries have hiked their interest rates to appeal to overseas investors.
India announced its first hike in four years after its central bank head publicly begged the US to slow down its hikes. Indonesia, Malaysia, the Philippines and Turkey have also cut their rates.
But South Africa will probably not follow. The Reserve Bank can’t afford to deal another blow to our shrinking economy.
Since the global financial crisis a decade ago, the US Federal Reserve (Fed) and European Central Bank (ECB) have been creating massive amounts of money (this is called “quantitative easing”) to support economies. Much of this money eventually flows to emerging market investments.
But the Fed and the ECB have been scaling down this support. The Fed is also trying to whip its balance sheet into better shape. The ECB may decide at its meeting next week to curb easing. This means less money will be floating around, and the investment flow to emerging markets may start to dry up.
In November last year, the rand was trading around R14.40 to a dollar. Since then, the currency rallied 20% as Cyril Ramaphosa first took charge of the ANC, and then of the country. But after it reached a pinnacle of R11.54 in February, the currency started losing its footing as more signs emerged that the economy won’t snap out of its lethargic streak soon.
Civil unrest, tax hikes and painful fuel price increases continued to weigh on confidence, and the negativity culminated in a stinker of a GDP number that was released earlier this week.
Panic selling, stops triggered, bond yields rising...what a day for the ZAR! Next week US rates will be higher than inflation for the first time in a decade! SA will have to work hard at attracting inflows, policy needs to be clear and we need to see growth.— Thabi Leoka (@thabileoka) June 7, 2018
Although the graph is worrying, it’s too early and is no reason to be despondent. The fact that we reached R11.50 is proof that we can do this. In any case, Ramaphosa has only been in office for less than 4 months. We can do this people?????????? https://t.co/ud57qle6MZ— Themba Maseko (@MasekoThembaJ) June 8, 2018
Last, and probably least, there are rumours that a large deal in the market may have triggered the currently meltdown.
“Whispers in the market have pointed to a big deal going through the market (Thursday) afternoon that exacerbated the slide in the rand, and a run on stop losses was the order of the afternoon,” said André Botha, senior currency dealer at the forex management platform TreasuryONE.
“With the rand already on the back-foot after the GDP data that was released earlier in the week, momentum was stacked against any rand recovery once the slide began.”
The rand still has its fans among large international investors, according to a Bloomberg report. Morgan Stanley believes the rand can strengthen by 11% to end the year at R11.40 to a dollar thanks to an expected "structural economic recovery". The French investment house Société Générale also believes it is oversold.
Bloomberg reports that the JP Morgan Chase has an overweight position in South Africa’s local-currency bonds thanks to the attractive real yields.