Emerging market (EM) currencies, including the rand, ran into the eye of the storm yesterday as investors dumped riskier assets for safe havens over concerns about global economic growth prospects after Fitch Ratings downgraded the US government’s top credit rating.
The rand fell 0.9% to R18.47 against the US dollar yesterday, down from the previous close of R18.30/$1 and its weakest in three weeks as the downgrade of the US rattled global markets.
The local currency also weakened 0.5% to R20.22 against the Euro, and 0.5% to R23.48 against the Pound.
The MSCI index for EM stocks lost 1.9% to a one-week low, while the currency index shed 0.4% to a three-week low, according to Reuters
Mergence Investment Managers chief investment officer Brad Preston yesterday said his model, South African (SA)-specific risk priced into the rand exchange rate had declined over the past month with a current decomposition of risk factors.
Preston said data was showing how load shedding risk had reduced and other SA-specific risk had now swung negative compared to the end of May.
“With recent SA-specific risk no longer reflected in the currency, the scope for further rand strength will rely on global factors, a weaker dollar, and a strong economic recovery from China,” Preston said.
“The peak of the US interest rate cycle and increasing Chinese stimulus should lend emerging market currencies support against the dollar, but a global recession later this year or next year could be a material headwind.”
This came after Fitch Ratings downgraded the US government’s top credit rating, which exacerbated concerns as global manufacturing data remained in the contractionary territory.
Fitch on Tuesday cut its US long-term debt rating from AAA to AA+ which resulted in the US Treasury yields weakening in the long end, and pushed the dollar firmer.
The ratings agency cited fiscal deterioration in the US over the next three years and repeated down-the-wire debt ceiling negotiations that threatened the government's ability to pay bills.
According to S&P Global, global manufacturing output fell for a second successive month in July to 49.0 points, down from 49.3 points in June, due to an intensification of the recent downturn in global goods trade.
ActivTrades technical analyst Pierre Veyret said the Fitch move was triggered by the swelling budget deficit in Washington, which has raised concerns about rising debt levels and their potential impact on the overall economy.
Veyret said the downgrade occurred only a few weeks after the suspension of the debt ceiling in the US.
“While this news is not perceived as a game changer in the financial markets, it is seen as significant enough to become a short-term bearish catalyst, inducing investors to take some profits out, especially following new all-time highs on European markets,” Veyret said.
“Across the EU benchmarks, most sectors are trading lower, with healthcare and tech shares showing the weakest performances.”
Meanwhile, South African stocks fell to a one-week low yesterday, led by a mixed bag of losses in MTN Group, Exxaro Resources, Tsogo Sun Northam Platinum and Impala Platinum shares.
The JSE All Share Index plunged 2.75% to trade around 76 477 points, its lowest in a week, tracking a global sell-off triggered by a surprise downgrade of the US government's credit rating by Fitch.
BUSINESS REPORT