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The South African Rand: Troubled as Moody's Remarks On Budget and Coronavirus Threat Grows

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- GBP/ZAR Spot Rate: 20.09, up +074% today

- Indicative bank rates for transfers: 19.40-19.54

- Indicative broker rates for transfers: 19.80-19.92 >> find out more about this rate.

The Rand fell to its lowest level against the Pound since the Brexit referendum on Friday and hit multi-year lows against the Dollar on a toxic combination of coronavirus and credit rating concerns. 

Moody’s, the last agency to rate South Africa as an ‘investment grade’ sovereign, appeared to give a thumbs down to the 2020 budget plan late Thursday and in the process, exacerbated losses that had been accruing throughout the session due to a global financial panic about the spread of coronavirus outside of China. 

“Risks remain skewed toward the higher debt path due to challenges in containing spending growth and persistent risks to growth,” the agency said on Thursday. “Risks to the budget forecasts are elevated.”

South Africa is of course waiting to hear if Moody’s will cut the credit rating to ‘junk’ in its March review after the government’s 2020 budget left the deficit and debt-to-GDP ratio on a sharp upward trajectory, even after Treasury took the plunge and announced its intention to cut back the public sector wage bill among other things in years ahead. 

Analysts have said Moody’s might spare South Africa a downgrade in March pending the outcome of the October budget plan and partly for this reason the Rand could continue to be weighed down by concerns about the rating even if next month’s review leaves the country’s investment grade badge intact. 

“It’s been a rough week for markets all round, as the global economy struggles to come to terms with the fallout of the COVID-19 virus and the ultimate fully fledged economic impact. Yesterday saw the rand come under pressure again, losing just over 1% during the local trading session, while testing a break above R15.50/$,” says Bianca Botes, a treasury partner at Peregrine Treasury Solutions. "A sustained break above R15.50 opens the door to R15.80."

Above: Pound-to-Rand rate shown at weekly intervals alongside USD/ZAR rate (orange line).

The USD/ZAR rate was quoted at 15.59 Friday, its highest level since 2016 after being caught up in a fierce sell-off that left no emerging market currency untouched. And with the Pound-to-Rand rate hit its highest level since June 23rd 2016, the day of the Brexit referendum, after a 3.5% gain for the week took it above the 20 handle and left it trading at 20.09 on Friday.

Peregrine’s Botes says the USD/ZAR rate could hit 15.80 over the coming days, if the coronavirus crisis worsens and investors remain in panic mode. That could lift the Pound-to-Rand rate as high as 20.38 so long as the Pound-to-Dollar rate remains around Friday’s 1.2885 level. The GBP/USD rate, however, could face further declines that temper the upward move in the Pound-to-Rand rate.

“EM currencies since January have shed as much as 10%. The South African rand, Brazilian real and Chilean peso have posted the worst performances. The relentless global spread of the coronavirus Covid-19 will likely continue to pose a headwind to EM currencies. The rand briefly gained some traction this week after Budget 2020 but has now lost ground to the USD as this virus has spread globally,” says Shireen Darmalingham, an economist at Standard Bank.

The increasingly rapid spread of coronavirus outside of China is causing pandemonium in stock markets and among other risk assets such as emerging market currencies. The virus has spread in earnest to countries including South Korea, Japan and Italy with local outbreaks gaining momentum through this week, while health ministers in Germany and other major EU economies appear to have thrown their hands in the air and resigned themselves to the idea that their countries will also suffer outbreaks.

The World Health Organization (WHO) describes the current problem as an "outbreak with multiple locations" but has remained steadfast in its reluctance to declare a pandemic which, among other things, could lead to economically damaging restrictions on international travel. 

"Risk-assets have been under significant pressure over the past week. Fund flows portray a strong reach for "safety" and low-beta, with inflows into high-grade and government bond funds continuing uninterrupted. On the flip side, "growth"-driven pockets, like high-yield, equities and loan funds have all suffered outflows. [Emerging market] debt has lost its momentum, with inflows materially slowing down w-o-w, amid a stronger dollar," says Ioannis Angelakis, a credit strategist at BofA Global Research.

Above: Pantheon Macroeconomics graph showing daily increases in coronavirus cases reported outside of China.

Sovereign bond yields have fallen sharply in all economies and to record lows in some parts as investors seek the perceived safety of government debts, and in the process the yield appeal of some currencies has been impact although most notably in the case of the U.S. Dollar. The risk-sensitive Dollar-Yen rate broke above the 1.12 handle barely more than a week ago and there was talk about it potentially hitting 1.20 but the upward move has since more than reversed, with the exchange rate trading down near 108 on Friday.

"In one line: New cases outside China accelerating rapidly," says Ian Shepherdson, chief economist at Pantheon Macroeconomics. "The total number of cases globally rose by 1,359 yesterday, accelerating from the 911 average over the previous five days. China cases rose by 433; the trend is stable. Non-China cases rose by 926; the trend is accelerating. The number of cases in both South Korea and Italy - the biggest outbreaks outside China - is accelerating."

European stock markets were all down more than 2% Friday, as they were on Thursday and Wednesday, after a bloody Asia session saw the Shanghai Composite Index decline -3.71% and Australia’s ASX 200 fall -3.25%.

London’s FTSE 100 has fallen -11.5% this week and is down -13.5% for 2020 while South Africa's FTSE/JSE Africa All Share index has shed more than 10% for the week after falling 5849 points. 

Brent crude oil prices have fallen -13% this week, in line with the trend in risk markets more broadly, although the 2020 loss is now nearing 25% and members of the Organization of Petroleum Exporting Countries (OPEC) cartel are leaking to the press that they could cut back output in order to boost prices. 

"While China is seeing fewer new cases—apparently--it is also seeing dozens of deaths each day (now 2,788 with 44 just added). That makes COVID-19 look more and more deadly," says Michael Every, a strategist at Rabobank. "The WHO helpfully stress that this “could get out of control” but still isn’t a global pandemic…so closing down global travel is not a solution. In hindsight, and not being the head of a World Health Organisation, might I ask if perhaps having done so a month ago might have done the trick? But too late. We now also see panic and confusion in parts of the US: dozens have now tested positive in California, with reports of potential virus patients being treated by staff without protective suits, while in Hawaii there has been panic buying reported."