The rand fell to its lowest level in six months yesterday as risk-off sentiment gripped markets on the back of global economic growth concerns and rotational power cuts in South Africa.
This comes as China’s retail sales fell the most in two years in April, declining by 11.1 percent from April last year, as consumption deteriorated amid widespread Covid-19 cases and strict restrictions in several key states, including Shanghai and Beijing.
Eskom also ramped up its rotational power cuts, and implemented Stage 4 power cuts after unit 2 of the Kusile power station tripped, taking 720MW of generating capacity with it.
These developments saw the rand weakening by nearly 1 percent to R16.29 to the US dollar during early morning trade, the lowest since November 26, before paring losses to R16.18 against the dollar later in the day.
By 5pm, the rand was at 6c lower, at R16.22 to the dollar, than the same time the previous day.
TreasuryONE currency risk strategist Andre Cilliers said the Covid-driven lockdowns were impacting the Chinese economy and effecting emerging market currencies, including the rand, in the process.
Cilliers said the R16.30 level had been tested on five occasions now and was still holding.
“Some very poor economic data out of China has seen emerging markets weaken to the Far East, with the rand taking the biggest hit,” he said.
“The rand, which had closed at R16.15 on Friday, weakened to R16.27 levels on the back of the Chinese data, but has managed to recover some of the losses and is currently quoted at R16.22.”
China matters greatly for South Africa as it is the country’s Africa’s main trading partner, a major consumer of South Africa’s commodity exports, as well as its main source of imports.
Old Mutual Wealth investment strategist Izak Odendaal said South Africa’s financial markets were heavily influenced by global investor sentiment towards emerging markets, which in turn was very sensitive to developments in China.
“A weak Chinese currency can also translate to rand weakness,” Odendaal said.
“In other words, slower Chinese growth could therefore negatively impact South Africa through several channels.”
The dollar firmed near two-year highs yesterday as US inflation came in higher-than-expected, keeping the Federal Reserve on course to tighten monetary policy aggressively.
Investec chief economist Annabel Bishop said the rand had remained weak as global financial markets stay risk-off, with US dollar strength now at a level nearing the peak in March 2020.
“The rand is suffering from a confluence of negative forces globally, driving risk-off and at risk of seeing further weakness if these worsen,” Bishop said.
“Domestically too, increased load shedding, a fifth wave of Covid-19 cases and feed through effects from the global economy risk growth.”
Bishop said the rand was likely to remain vulnerable to weakness this quarter, and risked seeing a weaker average than forecast for the second quarter of 2022.
The rand’s weakness is also expressed in the latest economic forecasts showing that South Africa’s economic activity slowed in the first quarter due to the Russia-Ukraine war, power cuts, rising Covid-19 cases and the devastating floods in KwaZulu-Natal.
The Bank of America’s sub-Saharan Africa economist Tatonga Rusike said South Africa’s growth risks were staked more to the downside, due to a combination of global and domestic risks.
“On global, it’s slowing growth globally, in China, plus risk-off sentiment in emerging markets,” Rusike said.
“Domestic constraints are re-emerging, with electricity supply shortages, rail network challenges for bulk commodities and potential impact of floods resulting in slower second quarter activity.”
siphelele.dludla@inl.co.za
BUSINESS REPORT ONLINE