The rand opened the new trading week on a weaker footing and plunged to a two-month low against the US dollar yesterday as risk aversion continued to permeate the markets on the back of US inflation and China’s economic growth concerns.
The domestic currency broke through the R19-mark again and weakened by 1.0% to R19.14 to the greenback by 4pm, its lowest since early June, as the dollar strengthened amid renewed worries about the US banking sector's health, and more evidence of slow recovery in China.
China’s sluggish economic recovery is expected to slow prices for industrial metals since the country is the world’s largest importer of commodities, which will inevitably impact South Africa’s exports momentum and the exchange rate of the rand.
Analysts yesterday said short-term sentiment did not look promising for the rand and the currency could see some further weakness going forward.
Old Mutual Wealth investment strategist Izak Odendaal said trouble in China was bound to reflect negatively on sentiment towards emerging markets, which will impact local financial markets.
“The rand’s sudden weakness in the past two weeks is probably due in part to global investors becoming more skittish on emerging markets and commodity producers. Secondly, China is a major trading partner and buyer of South African commodities,” Odendaal said.
“A less-commodity intensive growth model seems likely, and indeed we’ve already seen import volumes of iron ore, for instance, flatlining in recent years.”
Odendaal said South Africa should therefore use its membership of BRICS to diversify its exports to China and attract more Chinese tourists.
He said some shares on the JSE were heavily exposed to China, and Chinese companies collectively have not managed to turn rapid economic growth into meaningful returns for shareholders.
The rand was already under pressure last week as it briefly slipped to R19.05/$ on Thursday before ending the week at R18.97/$1 on Friday, mainly reflecting the impact of a stronger US dollar.
Some uncertainties surrounding the peak in US policy rates and growing hopes of a soft-landing in the US economy appeared to be supporting the greenback in recent weeks.
Domestic factors also weighed on the rand, with the violent and disruptive taxi strike in the Western Cape hurting sentiment, while the country’s disappearing trade surplus added further to the downside.
The weakness of the rand in August could also signal a significant increase in next month’s fuel prices on the back of rising global demand for crude oil amidst production cuts.
Investec chief economist Annabel Bishop said markets consequently tend to be risk averse in this period, with both perceived positive and negative market moving events having an exacerbated effect on financial market indicators, causing increased volatility as market reactions to events tend to be more pronounced.
Bishop said China’s Politburo referred to the economic recovery as “tortuous”, as weak economic data persisted with falling consumer prices on weak domestic demand highlighting the risk of deflation, along with lacklustre imports and poor export performance.
“This comes after the last third of July proved a more optimistic period for investor sentiment, with volatility a feature this year for markets and the rand. Worries over China’s economy are also fuelling risk aversion in markets,” Bishop said.
“Concerns over the global economic outlook, and especially from a small open commodity exporting country such as South Africa, negatively affects the rand, as does higher levels of risk aversion in global financial markets.”
Meanwhile, the JSE All Share Index edged 1.4% lower to 75 921 points yesterday as investors monitored risks to the global economic outlook ahead of the release of minutes of the US Federal Reserve’s latest policy meeting later in the week.
BUSINESS REPORT