The South African Rand is forecast to be under pressure in Tuesday’s trade, as fears over the Eskom bailout filter through global markets. Also, the US’ scrapping of its waiver on Iranian crude oil purchases will put pressure on emerging market currencies. Moreover, the upcoming inauguration of the new cabinet in SA could further hurt the rand’s prospects.
Global Risk Sentiment: The South African rand started off the week in a fairly flat range, trading in a 10 cent range. During the week, however, the rand rallied strongly against the major currencies. While global risks such as China’s slowdown and concerns about the country’s economy have made riskier currencies less attractive to investors, the rand is still outperforming the USD as a safer alternative. In addition, South Africa’s COVID-19 policies are also weighing on the currency.
In South Africa, rolling blackouts have increased in number. This has hurt the country’s economy and businesses. As a result, foreign investor confidence has dropped to its lowest level in over a decade. This negative sentiment is reflected in the declining foreign holdings of SA bonds. The local power utility Eskom will need to find a solution soon to regain investors’ confidence.
Despite a weak economic data release on Friday, the US and Chinese economies are likely to make key decisions later this week. The Federal Reserve will announce its interest rate decision on the 18th of September. In South Africa, the Reserve Bank will announce its interest rate decision on the 19th of September. Meanwhile, the yield on the benchmark 10-year bond is unchanged at 8.305%.
Global risk sentiment continues to weigh on the South African Rand, and a decline could make it vulnerable to further decline. The US Dollar, Euro, Pound, and Australian Dollar have risen against the Rand since 2013 and have now gained the most ground against the Rand. The British Pound, meanwhile, has recovered from the shock of Brexit. Both currencies have been hurt by ANC talk of nationalising the SRB.
The latest appointment of Mabuza has also impacted the rand. His appointment has brought into focus the recent allegations of corruption in government, which have hurt the party’s popularity. Investors are looking for proof that Ramaphosa’s clean governance pledge is real. Mabuza has denied any wrongdoing and wants to face the accusations in court. However, this has not deterred the rand from outperforming its peers in the EM market last week. Last week, the rand held its gains due to positive politics and expectations over the new cabinet.
Recent economic growth numbers are not encouraging. The Reserve Bank of South Africa (SARB) has hinted at a 25 basis point interest rate cut in late 2020 or early 2021. With a weak economy, the ANC lekgotla has committed to broadening its mandate to include more than just inflation targeting.