The rand plunged to a two-year low yesterday as the ongoing energy crisis in Europe and the decision to cut global oil output deepened the rout in the markets.
Members of the world's seven largest “advanced” economies, the Group of Seven (G7), on Friday agreed to impose a price cap on Russian oil in a bid to hit Moscow's ability to finance its war in Ukraine and also help reduce global energy prices.
However, Russia retaliated over the weekend and cut gas flows to Europe by shutting down the Nord Stream 1 pipeline indefinitely yet again.
This comes as investors are concerned about rising global recession risks, prompted by the worsening energy crisis and expectations of further monetary policy tightening.
This ongoing “cold war” between Russia and Western countries saw the euro fall to 20-year lows against the US dollar, while the pound also tumbled amid energy and growth concerns.
The rand was also not spared the rod as it crossed the R17-mark to the US dollar early yesterday, touching lowest since August 2020 at R17.42 to the greenback from R16.86/$1 a week ago.
Against the US dollar, the rand has weakened for three straight months, losing four percent in June, 2.2 in July, and 2.7 in August, and bringing the rand’s depreciation against the greenback to 7.6 percent over the year to date.
Economists forecast that the rand was likely to remain volatile and tend towards weakness in the remainder of the quarter before picking up somewhat towards year end as investors sought the safety of the dollar.
Investec chief economist Annabel Bishop said the markets worry that the global inflation environment might get worse from this point, not better, given the persistence of the Russia/Ukraine war, retaliatory sanctions and Russia cutting gas supplies as the Northern Hemisphere winter draws in.
“The current environment is unique in recent times as it provides forewarning of a marked global economic slowdown, to the potential point of, or actual, recession, as opposed to the pandemic and 2008/09 financial crisis, which were sudden and not possible to prepare for,” Bishop said.
The JSE All Share index was down 0.4 percent to around 67 136 points as investors continued to weigh global recession risks.
Nedbank senior economist Nicky Weimar said investors remained wary of emerging markets economies, including South Africa, as the pressure on the currencies of countries with weak economic and policy fundamentals will likely continue to increase, particularly on nations with high levels of dollar-denominated debt.
“The outlook for 2023 remains hazy, clouded by the unfolding downturn in the world economy, the long shadow of Russia’s war on Ukraine, generally unsettled global energy markets, and the overwhelming disruptive forces of climate change,” Weimar said.
“On top of these, the domestic electricity shortage remains a binding constraint on the economy’s ability to pick up any meaningful pace on a sustained basis.”
Meanwhile, the price of Brent crude oil rose more than 3.5 percent above the $96-per-barrel (R1649) mark after the Organisation of Petroleum Exporting Countries and its allies (OPEC+) decided to halt the breaks on output.
OPEC+ yesterday surprised markets by agreeing on a slight oil production cut to support prices that have tumbled on fears about a potential global recession-driven demand downturn.
The oil cartel will reduce output by 100 000 barrels per day from October to deal with macroeconomic headwinds and counter a potential supply boost from Iran.
However, South Africa has already benefited from low global oil prices as the average Brent crude oil price eased from $105 per barrel to $94 per barrel in August.
As a result, domestic fuel prices will be reduced considerably, effective from Wednesday, with both grades of petrol decreasing by R2.04 cents per litre while diesel will decrease by 56 cents.
BUSINESS REPORT