Risk aversion hits the rand
The rand has hit new historic lows as risk aversion spiked globally on falls in China’s stock market and a wobble in the US, with foreign portfolio disinvestment from emerging markets (South Africa saw a R1.6 billion outflow on Friday).
Lower commodity prices ensued in the global market turmoil.
Bond yields have also spiked up, with the R186 at 9.75 percent, from 9.48 percent on Friday, as market concerns about substantially higher interest rates following the rand’s collapse fed into local markets, raising both the cost of borrowing and perceived risk of further credit rating downgrades.
Illiquidity also has an effect on the domestic currency.
With Asian markets open earlier than ours, the domestic currency is reported to have neared R18 to the dollar before South African markets opened today, with Asian rand liquidation positions also reported.
The culmination of negative news, particularly the liquidation of the previous carry trade into South Africa from the Japanese yen noted, has seen the rand record R16.77 once South African markets opened today and R24.35 to the pound, mainly on the move into safe haven investments.
Additionally, global market rumours of further South Africa’s and Brazil credit rating downgrades negatively impacted the rand.
Global risk aversion has always impacted the rand very substantially as it is a highly liquid, heavily traded currency, with up to a $25bn (R419bn) daily turnover recorded.
The carry trade operates heavily in the rand market and so sentiment is a key determinant for the local currency.
Expectations of higher interest rates can also cause a reversal in the carry trade as investors seek to get out before expected rand weakness, and then come in at cheaper levels to benefit from the higher yield.
The best move for local authorities is likely to do nothing and allow the domestic currency to ride out the global market distress, anything else could result in directional trading (and so further marked rand weakness).
The rand is heavily oversold.
* Annabel Bishop is the chief economist at Investec.
** The views expressed here do not necessarily reflect those of Independent Media.