The rand fell significantly, setting a new record low overnight, with the exchange rate approaching R19.83 to the dollar. The outcome of the monetary policy committee meeting on Thursday was primarily responsible for this decline. Analysts are divided on what factors are contributing to the rand’s weakness. Some worry about the economic consequences of another aggressive interest rate hike, while others blame the slump on the monetary policy committee’s more dovish tone.
The rand fell to a new record low on Thursday night, reaching R19.8279/$, representing a staggering 26% loss in value over the previous year. The currency has dropped 8% in the last two weeks alone, which can be attributed to the United States’ recent accusation that Russia received arms in South Africa.
Following the meeting of the South African Reserve Bank’s monetary policy committee on Thursday, the sell-off continued. Some analysts attribute the slump to Reserve Bank Governor Lesetja Kganyago’s less hawkish stance on future rate hikes. Kganyago emphasized that, while the bank had been tightening monetary policy for some time, it had not yet reached “restrictive territory.” His statement was interpreted as an indication that the bank may not raise interest rates further.
Higher interest rates typically make rand assets more appealing to international investors. However, the prospect of other countries raising their interest rates reduces the rand’s attractiveness. Some analysts, on the other hand, believe that the sharp drop in the rand can be attributed to concerns about the potential economic fallout from another aggressive interest rate hike. South Africa is already on the verge of a recession as a result of the negative effects of load shedding on the country.
Michelle Wohlberg, a fixed-income analyst at Rand Merchant Bank, speculated that the currency’s poor reaction to an interest rate hike could indicate a policy blunder. “The yield curve has steepened aggressively following the rate hike as fiscal fears begin to play in investors’ minds on the back of poor growth prospects,” she said. The impact was visible in the significant drop in government bond yields on Thursday.
Wells Fargo Securities’ Brendan McKenna, an emerging-markets strategist, expressed concern about the local economy, saying, “It’s difficult to make a really compelling case to deploy capital toward South Africa and the rand at the moment.” He emphasized that the rand has underperformed as an emerging market currency this year and is likely to continue doing so based on South African Reserve Bank commentary.
Governor Kganyago expressed concern about the possibility of further currency weakness, citing the risks of inflation, significant domestic and external financing needs, and ongoing load shedding. Bloomberg’s forecast model, based on rand options trading, predicts that the rand will fall below the R20/$ level in the coming week.
Despite the current situation, FNB portfolio manager Wayne McCurrie noted that the rand has a history of recovering from record lows. He was upbeat about the medium-term outlook, saying, “The medium-term outlook for the rand remains positive.” Fair value is still less than R17/$, and every time the rand has fallen, it has recovered to fair value.”
However, in the short term, the weakened rand is likely to contribute to South Africa’s high inflation. The country is heavily reliant on imports for fuel, and key crops such as maize and wheat are priced in dollars based on import and export parity.
The rand was trading at R19.71 per dollar, R24.34 per pound, and R21.16 per euro on Friday morning.
