Financial markets in South Africa came under serious pressure as the rand fell over the last week after a risk-off sentiment engulfed developed markets on the back of weakening demand in China, while the US economy added fewer jobs than expected in July.
The rand moderated at R18.47 against the US dollar on Friday as China’s continued disappointing economic data was reverberating against emerging markets’ currencies.
The markets have also been concerned about recession, particularly in the US but expectations are increasingly changing, including those of the Federal Reserve, as fears are being cast aside, with a soft landing being seen as more likely.
In addition, rating agency Fitch downgraded the US’s rating from AAA to AA+, citing fiscal deterioration over the next three years and repeated last-minute debt ceiling negotiations, which threaten the US government’s ability to pay its bills, as major reasons.
Fitch was the second major rating agency after S&P Global’s to take away the US triple-A credit rating.
Analysts said it was difficult to pinpoint what sparked the risk-off shift in the market over the week, but the rand will remain on the back foot while this sentiment persisted.
Investec chief economist Annabel Bishop said the rand was still facing risk off, with climate worries adding to market concerns as the world reached just above 1.5℃ in global warming in July.
Bishop said the rand had pulled back only slightly after reaching R18.80/$1 on Thursday, its lowest in three weeks, and had lost close to 9.0% now while the US dollar had only gained closer to 2% over the period.
“Commodity prices are lower on the month to date so far, and sentiment has been negatively impacted by weak economic data coming out from China, with a hoped for economic stimulus package not yet announced, and the delay weighing on markets,” Bishop said.
“Against the key crosses the rand has weakened to, as rand weakness proves a significant driver, besides US dollar strength, over the past two weeks.”
On Friday, a joint statement from a number of China’s economic committees indicated that the Chinese government would implement more stimulus measures to support consumer spending and liquidity, although key details were not forthcoming.
China, a key commodity importer continues to disappoint markets in its post COVID-19 recovery, which has been suppressing commodity prices and commodity currencies, with market disappointment on delay in providing stimulus.
Anchor Capital’s co-chief investment officer Nolan Wapenaar, said their view was that the rand will most likely wobble along at around R17.50 to R18.50/$1 with a slight strengthening bias.
Wapenaar said the rand was still cheaper than its fair value and with good reason when considering the purchasing power parity, and he did not expect this gap to close any time soon.
“We do not think the risk-off sentiment or the movement in the local currency is justified on fundamentals, and we are looking to take advantage of this. The rand is a few cents cheaper than the top-end of our range,” Wapenaar said.
“Instead, we believe that the rand has moved from the bottom of our 2022 fair range to just outside the top. This is quite normal for the local unit during periods of risk-off sentiment.”
Meanwhile, the JSE All Share Index regained some traction to close about 0.3% up at 76 961 on Friday, extending gains for the second session, as solid gains in financials more than offset declines in resource-linked sectors and techs Prosus and Naspers.
Traders digested a fresh batch of corporate earnings and a mixed US jobs report that could pave the way for the Fed to end its tightening campaign soon.
For the week, the JSE booked a 2% loss, its biggest weekly decline since mid-June.
BUSINESS REPORT