The rand has continued on its slide amid a strengthening dollar after disappointing economic data from major economies reinforced global recession fears.
The domestic currency yesterday weakened by 0.63 percent to R16.79 compared to the US dollar during early trade, its lowest since August 3, as the economy underwhelms.
The under-performance in the mining, manufacturing and retail industries through to the end of June cemented expectations that South Africa's economic activity will shrink in the second quarter and drag overall 2022 growth.
The US Federal Open Market Committee (FOMC) meeting also rattled the currency markets due to fears of an onset of a global economic slowdown.
Investec chief economist Annabel Bishop said the rand weakened on global and domestic growth concerns.
Bishop said the weaker-than-expected real retail sales figure for June also caused the rand to weaken, a negative for South Africa’s 2022 growth outlook.
“The Fed’s focus on inflation, weakening US and South Africa’s (economic) data all support rand depreciation,” Bishop said.
“The uncertainty around the size of the Fed’s next move, and its analysis of the weakening activity levels in various parts of the economy, caused the markets to see some increase in risk aversion.”
The minutes from the US Fed were hawkish and showed a definite increase in members’ recognition of the weakening US economic environment.
The FOMC maintained its stance of higher interest rates for longer, pointing to a steady rate hiking trajectory in coming months in a bid to contain inflation expectations.
The markets are currently leaning towards a 50 basis points (bps) rate hike in October, but 75 basis points is still possible.
Domestically, the South African Reserve Bank raised the key repo rate by more than expected 75 bps at its July meeting and signalled further aggressive monetary tightening ahead to tame the surging domestic inflation.
Headline consumer inflation topped 7.4 percent in June, the highest since May 2009.
TreasuryONE currency strategist André Cilliers said risk-sensitive currencies had come under pressure yesterday as recession fears continued to grow.
“The overriding message to come out of the FOMC minutes is that the Fed will continue to hike rates for as long as inflation remains above the 2 percent target,” Cilliers said.
“However, the pace and size of the hikes could slow depending on fresh data in the coming months.”
Michael Kruger, senior investment analyst at Morningstar Investment Management SA, also attributed the rand volatility to global macro-economic factors.
As a small, open, emerging market that makes up less than 1 percent of the world economy, the rand is more likely to be affected by what is happening globally rather than in South Africa.
This was further exacerbated by the fact that the rand is one of the most liquid and tradeable currencies when compared to other emerging market currencies globally.
Kruger said the rand was currently slightly undervalued on a Purchasing Power Parity basis.
“We would, therefore, expect the rand to depreciate against (major developed market) currencies over the long term, regardless of the short-term moves based on global economic factors, the commodity cycle, or local political developments,” Kruger said.
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