JOHANNESBURG – The rand broke through the psychological level of R17 against the US dollar on Monday for the first time in 22 months on fears of a global recession as markets brace for a new dovish stance on interest rates from the US Federal Reserve.
The local currency was down more than 1% at 17.08 rand at 4pm on Monday after trading opened on the JSE at 9am at 16.92 rand against the greenback, also helped by strength dollar after strong US jobs data came under pressure from Friday.
It was the weakest rand since September 2020 after demand increased following the easing of Covid-19 restrictions.
Unemployment in the United States remained unchanged at 3.6%, even as the world’s largest economy added 372,000 jobs in June.
It left a confusing picture of exactly what the economy was doing, but also fears of a slowdown in activity amid recession fears, at least for now, due to rising inflation, which opened the door for the Fed to continue its aggressive-walking path.
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TreasuryONE lead broker Andre Botha said the only real currency against which the rand is losing ground is the US dollar.
“We have seen the US dollar soar over the past week as global recession fears and expectations that the US Fed will continue its aggressive rate hike cycle led the market to turn to the US dollar,” Botha said.
“If we look at the rand against other emerging market peers, we see that the rand has lost the same value as most currencies in the basket, making the recent move a play on the US dollar.”
There were fears of a global recession after major central banks began a gradual normalization of monetary policy amid accelerating global inflation.
This represents a complete reversal by central banks from aggressive rate cuts to support the post-Covid economic recovery.
Higher-than-expected inflation data from South Africa for June also points to another rate hike later this month following a 50 basis point hike in May.
Investec Chief Economist Annabel Bishop said the rand was under significant pressure due to the strength of the US dollar and was being battered by negative sentiment on international and domestic events.
“Market worries about high inflation are increasingly being replaced by fears of excessive interest rate hikes pushing economies into recession, and risk sentiment in global financial markets is fragile and clearly on the mend. safe from risk,” Bishop said.
“At the domestic level, the heavy load shedding has also worried markets about South Africa’s growth prospects, which in turn are likely to have a negative impact on public finances due to revenue generation.”
Eskom announced yesterday that rotational load shedding will continue for at least the coming week for up to 10 days due to a major maintenance backlog.
Despite progress in some structural economic reforms in recent years, the electricity situation in South Africa has not improved and has even deteriorated.
Old Mutual Investments strategist Izak Odendaal said the market narrative has shifted very quickly this year from “inflation is fleeting” to “inflation is out of control and will require aggressive rate hikes from central bank” to where we more or less are today, namely, “Recession is becoming more likely, and so inflation and interest rates should eventually come down.”
He said if there was a global recession, it would likely be relatively mild in major developed economies. Household and corporate balance sheets were generally in good shape, with few signs of excessive leverage and irrational exuberance.
“The deepest recessions are usually associated with banking crises that follow a buildup of bad debt usually associated with a housing bubble. Although there has been a real estate boom in most developed countries, borrowers and lenders have generally done well,” Odendaal said.
- source: IOL
