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Rand exchange rate leads nervousness on financial markets

THE RAND exchange rate last week started to build up pressure as the currency depreciated noticeably against most other currencies. | Bloomberg

THE RAND exchange rate last week started to build up pressure as the currency depreciated noticeably against most other currencies. | Bloomberg

Published Apr 25, 2022


IT IS well known among economist and market analysts that the rand exchange is one of the leading market indicators that shows direction for the economy and financial markets in terms of equity prices, bond rates and interest.

One can almost compare the exchange rate with the blood pressure or temperature of a human being. If the blood pressure or temperature of the body increases, then it points towards some infection or illness that may prevail.

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The rand exchange rate last week started to build up pressure as the currency depreciated noticeably against most other currencies. It was not only a question of a stronger dollar, but more perceptions around South Africa’s economic prospects and the role of geopolitical factors.

The rand lost more than 110 cents, or 7 percent, during the past two weeks, depreciating from R14.50 to the dollar on Friday, April 8, to R15.61 last Friday, April 22. Against the pound, the currency had depreciated by 114c the past two weeks, trading Friday afternoon at R20.05, and lost 100c against the euro last week alone and traded on R16.83.

The build up to this strong depreciation of the rand was mostly due to the US inflation rate that increased in March by another 60 basis points to 8.5 percent, the highest since December 1981. This figure does underwrite the US Federal Reserve’s intention to increase the US bank rate seven times this year, at each of its remaining meetings.

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These expectations boosted the dollar as it becomes a haven for investors and is expected to take the place of gold in months to come. The gold price together with other metals like the platinum group (platinum and palladium) and silver were sold sharply over the past two weeks.

Weaker than expected global economic growth as forecast by the latest International Monetary Fund: World Economic Outlook report also contributes to weaker emerging market currencies. The report, which was published last week, forecasts that world economic growth is now projected to slow from a “projected 6.1 percent in 2021, to 3.6 percent in 2022 and 2023”.

The war in Ukraine has triggered economic damage over a wide front and will lead to unprecedented price increases of food and fuel over the next year.

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Domestically, prospects of weaker economic growth after the floods in KwaZulu-Natal, fuel prices that increased 33.2 percent in March 2022 (year-on-year), load shedding and the lack of logistical support (roads and terminal operations at harbours) contributed to a weaker currency. This sharp depreciation in the rand indicates that financial markets and the economy will remain under pressure.

The result of the weaker currency, higher interest and inflation rates and worrying economic prospects locally and globally, took its toll on share prices on the JSE.

Over the past two weeks, the all share index lost 3.4 percent and is now trading 2 percent lower for the year to date. The Industrial 25 index recovered somewhat last week (2.2 percent), but still trails -15.7 percent down for the year. The Resources 10 index lost more than 7 percent last week, while the Fin15 (financials) traded marginally higher by 0.8 percent.

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On Wall Street share prices also took a hiding last week, especially on Friday. The Dow Jones Industrial index lost 2.8 percent on the day and is now 7.8 percent down for the year. The S&P500 index traded down by 2.8 percent on Friday and is now 11.5 percent lower for the year to date. The I-Tech index on the Nasdaq was down by 2.6 percent on Friday, shedding 19.5 percent since the beginning of the year.

This coming week, the SA Reserve Bank will release its composite leading business cycle indicator on Tuesday. StatsSA will announce the production inflation rate (PPI) for March on Wednesday.

It is expected that the PPI rate had increased further to 10.8 percent, up from 10.5 percent in February, indicating that consumer inflation is bound to increase further.

The all-important balance of trade data for March will be released by Customs and Excise on Friday. On global markets the US, EU, France, and Germany will publish their first estimated gross domestic product economic growth rates for quarter one 2022. The US durable orders for March and various housing data will also be published, and on Friday the latest US personal income and spending numbers will also draw attention.

Dr Chris Harmse is the economist at CH Economics and lecturer at the School of Commerce at Stadio Multiversity


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