File picture: Philimon Bulawayo

JOHANNESBURG - The resurgent dollar yesterday saw the rand continue its downward trend with the demand for the local currency dampened by disappointing data which showed a R13billion budget deficit for August, spiking fears that further credit downgrades were looming.

The local unit weakened nearly 1percent against the greenback and was bid at R13.6842 as it struggled to find its footing amid deteriorating sentiment. In intra-day trade, the rand reached a more than five months low of R13.76 against the dollar. The slumber of the rand follows negative sentiment that emerging market currencies were expected to suffer in a climate of renewed dollar strength. Investec analysts said that outflows from bonds had been particularly impactful.

“The problem for South Africa is that it remains one of the standout recipients of hot money flows, which render it vulnerable to a turn in sentiment either local or abroad. At the moment it is a combination of both, which makes it difficult for the rand to withstand the poor sentiment and it has weakened,” Investec said. “Although the domestic fundamentals continue to suggest that the rand has yet to reach its terminal inflection point, there is no question that political developments have detracted from the overall performance of the local unit and will likely continue doing so to the end of the year.”

The Institute of International Finance report on capital flows to emerging markets yesterday said that prospects for capital flows in South Africa going forward hinged on both global market conditions and local developments. Last week the rand opened at R13.33 to the dollar, and then weakened to R13.63 on the back of increased prospects of a future US interest rate hike.

The dollar rose 1percent last week, its best week of the year. The US Federal Reserve Bank’s Federal Open Market Committee, which set US interest rates last week, sprung a surprise in its September policy meeting when it left the rate unchanged against the market expectation of a balance sheet reduction programme. The committee instead took a surprising hawkish monetary tone and indicated confidence in the US economy, signalling the possibility of another rate hike before the end of 2017 - and three more hikes in 2018.

Merchant West forex and money market trader Tiffany Pollock said the local economic outlook leaves much to be desired and has become increasingly evident in the substantial weakening of the rand over the past weeks. “The weaker rand could also spur some inflationary pressures and could delay the Sarb's plans to cut interest rates in the short-term. Despite the dim local outlook, international factors have been the majority contributor to the latest rand tumble, with markets keeping a close eye on developments in the US,” Pollock said.

According to funds monitor EPFR Global, Institutional investors are sniffing out bargains with more than $90billion (R1.22trillion) having been ploughed into emerging market equity funds this year.