The rand yesterday remained subdued as emerging markets currencies tumbled due to the strengthening US dollar as the largest economy in the world debt ceiling agreement while the energy crisis dimmed sentiment against the currency.
The domestic currency started the day trading at around R19.71 against the greenback, not far from a recent record low of R19.80/$1, before claiming some ground back to return to Friday’s close of R19.65/$1 by 4pm.
The US dollar hovered near its highest levels in ten weeks yesterday, supported by strong US economic data that bolstered expectations of further policy tightening by the US Federal Reserve, and news that a tentative debt ceiling deal was reached over the weekend.
On Saturday, US President Joe Biden and Republican leader Kevin McCarthy announced a deal to raise the debt ceiling of $31.5 trillion after weeks of difficult negotiations.
The deal will allow the US government to keep paying its bills after teetering on the brink of default with only a few days to spare before the 5 June deadline, avoiding a situation that would have plunged the world's biggest economy into turmoil.
Citadel Global director Bianca Botes said the US dollar said the agreement around the debt ceiling was the news that global financial markets were craving.
“A provisional debt deal was struck in the US over the weekend, improving sentiment in the global markets,” Botes said.
“The dollar held onto its gains and remains at elevated levels as strong data from the US, including high inflation readings, has cemented expectations for yet another hike by the Fed in June.”
The rand was not the only emerging-market currency under pressure as the Turkish lira also weakened to a record low against the US dollar as Recep Tayyip Erdogan won the presidency in a runoff election, extending his rule for a third decade.
The rand has already depreciated about 7% against the greenback this month on the back of deteriorating economic prospects mainly due to South Africa’s energy crisis.
Old Mutual Wealth Investment Strategist, Izak Odendaal said there were many factors behind the rand’s depreciation, and they were driving the SA Reserve Bank’s (SARB’s) hawkish policy decisions.
“The main reason behind the rand’s weakness is of course load shedding, but the US dollar has also rebounded since the start of May,” Odendaal said.
“There also seems to be a growing concern that the government’s domestic policy incoherence is spilling over to the foreign policy sphere, with negative implications for the country’s ability to attract long-term investment.”
Indeed, the latest monetary policy statement that the SARB expected further currency weakness ahead has compounded sentiment against the rand.
In a note, the Bureau for Economic Research yesterday said markets seemed to have overreacted to commentary in the Sarb statement accompanying the rate decision that ‘further rand weakness’ was likely.
BUSINESS REPORT