Flight to safe havens leaves rand floundering

The rand may not have crossed the R20/$ mark on Monday, but it was among the poorer performing emerging market currency’s during the day’s session.

The local currency has been suffering as investors rush to safe haven currencies amid the Covid-19 crisis. The Reserve Bank, in its April Monetary Policy Review, released on Monday, has also noted this “flight to safety”, highlighting a greater appetite for dollars, over emerging market currencies.

“The sell-off is attributable to both the risk aversion caused by the Covid-19 pandemic, and the country’s downgrade by two rating agencies in the span of a week,” Bianca Botes, executive director of Peregrine Treasury Solutions, said in a market update on Monday morning.

The rand reached a low of R19.35/$ in early morning trade on Monday, but closed at R18.69 against the greenback.

Earlier in the session, it was still reeling from the impact of a second ratings downgrade, another notch lower into sub-investment grade, by Fitch ratings on Friday. “The downgrade from Fitch saw increased risk aversion to South African financial market assets, in contrast to those of other emerging markets,” said Investec chief economist Annabel Bishop.

Most emerging market currencies – bar the Turkish lira, the Mexican peso, the Malaysian Ringgit and the rand – were stronger or flat against the dollar during the morning session. However, there was a positive turn in the afternoon, as an improved global risk sentiment helped the rand improve slightly, Bishop explained.

“Some measure of risk appetite later returned to global financial markets as the US indicated that its Covid-19 outbreak could hopefully be levelling off,” Bishop said. “Firmer indications that the Covid-19 curve is flattening in the US in particular would reduce global risk sentiment more substantially, and aid economic forecasts to become clearer.” However, a substantial reduction in market risk aversion is required to see a recovery in the rand, Bishop added.

Capital outflows

Risk-off market sentiments has seen capital outflows of as much as $70 billion from emerging markets since 2017. Of this, $6 billion worth of capital has left SA, according to member of the Monetary Policy Committee Dr Chris Loewald.

But Loewald noted that the SA Reserve Bank has the policy space to respond to the economic impacts caused by Covid-19. This was seen when the Reserve Bank took steps to manage liquidity of the financial market system, as well as slashing interest rates by 100 basis points, the latter having put back as much as R32 billion in the hands of households and businesses. The repo rate, of 5.25{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2}, is the lowest it’s been since 2014.

“Monetary stimulus can help mitigate the economic costs of the Covid-19 shock, by supporting the spending power of firms and households,” the review read. However, SA’s economy was battling with pre-existing growth constraints and was in technical recession before Covid-19 reached its shores and warranted a 21-day lockdown which has brought economic activity to a halt. “Better long-term growth prospects will therefore require a range of interventions, many of them outside the domain of the central bank,” the review read.

Izak Odendaal and Dave Mohr, investment strategists of Old Mutual Wealth, expect the Reserve Bank to have more room to cut interest rates as inflation is expected to decline further.

A weaker rand normally is expected to push upward pressure on inflation, which will see imported items become more expensive. But Odendaal and Mohr point out that we are not in normal circumstances. Local retailers might not be able to pass on higher prices to consumers, as they face a competitive trading environment and could risk losing business if they raise prices. “Given the completely depressed state of the local economy, pricing power is likely to be even more diminished,” Odendaal and Mohr said.

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