Rand collapses as global markets scare
The rand was the worst performing emerging market currency this week.
On Friday morning, the rand fell nearly 3% to R15.39 / $ – a level last seen in early March of this year.
The local currency came under pressure as the dollar rallied to its best level since last year.
Dollar / rand exchange rate. Source: XE
The US currency began to climb after the minutes of the Federal Reserve’s July meeting were released on Wednesday and signaled its willingness to start cutting asset purchases before the end of 2021.
“While the markets have widely anticipated that the Fed will start to consider reducing its asset purchases, there has been little confirmation of when, so far,” said Bianca Botes, director of Citadel Global.
“While more details on the exact nature of the cut will likely not be discussed until the next Jackson Hole Symposium, minutes were enough to push the dollar up to a nine-month high.”
“A reduction in asset purchases usually boosts the dollar because there will be less liquidity being pumped into the financial system.”
The prospects of slowing global growth due to the Covid-19 epidemics have also affected risk appetite, supporting the dollar, which is seen as a safe haven for investors.
Global growth is essential for emerging markets to thrive, and suppressed growth will be negative for countries like South Africa, said Andre Cilliers, currency strategist at TreasuryONE.
The rand was the weakest emerging market currency this week. “It looks like the dynamic is for emerging markets to stay a bit weak in the near term,” Cilliers said.
The sharp drops in commodity prices and the prospect of a return to power cuts also weighed on the rand.
Some members of the Fed also expressed concern about inflation in the minutes, which heightened speculation that US interest rates could be raised sooner than expected. Higher interest rates make holding the dollar more attractive against other currencies.
Meanwhile, South Africa’s inflation rate fell to its lowest level in three months in July (4.6% – down from 4.9% in June), which could mean that rates d Local interests might not be picked up anytime soon.
By mid-morning, the rand was also trading at 20.92 rand to the pound and 17.93 rand to the euro.