The rand weakened 1.5 percent and hit R13.8664 against the dollar at 12.20pm, minutes after the Treasury made the announcement.
It later parried the losses to R13.77 by 5pm.
The rand has been on the back foot following President Jacob Zuma’s decision to change his cabinet, which included the replacement of former finance minister Pravin Gordhan and his deputy, Mcebisi Jonas, who have been replaced by Malusi Gigaba and Sfiso Buthelezi, respectively.
Ratings agency S&P's Global Ratings earlier this week downgraded South Africa’s sovereign credit rating to sub-investment grade.
Inan Demir, a senior emerging market economist at Nomura, said there was room for further weakness in South African assets, with Zuma’s position not as weak as had been previously perceived.
“With the broader implications of last week’s cabinet reshuffle in South Africa still being digested, capital markets have been quick to react,” Demir said.
KPMG chief economist Lullu Krugel said that the rand was extremely vulnerable at the moment.
Krugel said the downgrade was, however, unlikely to result in a permanent effect to the currency.
“We believe there is a fundamental underpin favouring emerging markets at the moment, which may be curbing the extent of rand depreciation. In addition, Moody’s clarified that the review process typically takes between 30 and 90 days and as such we are unlikely to see a downgrade on the previously-scheduled rating review date of April 7, 2017,” said Sanisha Packirisamy, an economist at MMI Investments and Saving.
The banking stocks yesterday closed 2.38 percent weaker. Christie Viljoen, an economist at KPMG, said banking stocks were down because most companies rated under S&P's would also undergo a downgrade on their own ratings. As a consequence, said Viljoen, the mining sectors have become a safe haven for investors.
“The prices are in dollars. They are seen as a safe haven. They are not as affected as the local economy such as banks or retail stocks. When the rand is weaker it means you’re getting more rand revenue for all the dollar commodities,” said Viljoen.
Fuzile yesterday confirmed his resignation, barely a week after his former boss, Gordhan, was axed. His resignation comes as the country mulled the implication of S&P’s decision on Monday to downgrade South Africa.
Krugel said Fuzile’s imminent departure came at a crucial moment. “Continuity is of critical importance,” said Krugel.
Commenting on the market reaction to the further changes at Treasury, Izak Odendaal, an Investment Strategist at Old Mutual Multi-Managers said: “The market is pricing in a lot of bad news in terms of South Africa’s fiscal future. It is not clear that news of his resignation moved the dial much.”
Odendaal said the timing of Fuzile’s resignation was unfortunate as he was highly regarded by the market.