South African Rand Eyes New Record Low as Emerging Market Exodus Continues 

Image © Government of South Africa, reproduced under CC licensing

- GBP/ZAR Spot Rate: 20.08 +0.30% today

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The Rand suffered heavy losses Wednesday and already hit a new record low against the Dollar, according to some data vendors, as the exodus of capital from emerging market economies continued although the South African unit was accompanied by Pound Sterling on its way toward historic lows.

Investors are liquidating portfolios in a manner rarely if-ever seen before in modern times, with traditional risk assets like stocks and commodities being hammered while even typical safe-haven assets like government bonds also hemorrhage capital. Panic in financial markets is benefitting the U.S. bond market, where yields fell on Wednesday, and Dollar to the detriment of all other currencies. Many non-U.S. bond markets are also seeing outflows too.

"The rand has breached R17.00/$ with ease as the sell-off on the back of the Covid-19 virus pandemic continues to wreak havoc across financial markets. As the world braces for the anticipated global economic fallout of the pandemic, the continued sell-off also saw bond yields skyrocket, as investors unloaded South African and other emerging market assets in a bid to de-risk their holdings," says Bianca Botes, a treasury partner at Peregrine Treasury Solutions. 

This lifted the USD/ZAR rate 3.21% to a new record high just above 17.00 on Wednesday, although some data providers suggest that’s actually up around 17.80. The USD/ZAR rate has surged back above the 78.6% Fibonacci retracement of the January 2016 downtrend in the last week although it’s tipped by technical analysts to consolidate just under the 17.0 level from here ahead of an ancipated move lower over the coming weeks. 

Above: Pound-to-Rand rate shown at weekly intervals with Fibonacci retracements of January 2016 downtrend marked out.

“We still believe that a top has or is in the process of being formed around the 16.9932 high and that the March 13 low at 16.0205 as well as the early March high at 15.8588 may soon be retested,” says Axel Rudolph, a technical analyst at Commerzbank. “Above the high at 16.9932 lie the psychological 17.0000 mark and the January high at 17.8902.”

The Rand has been bruised in the exodus from risk assets but it’s not alone because nowhere else has investor aversion to risk been as apparent than in Europe where French bond yields rose more than 50% Wednesday.

London’s stock markets slumped as the government’s 10-year bond yield rose nearly 30%, with heavy and widespread losses for Sterling ensuing amid reports suggesting the government is planning to “heavily restrict” travel into and out of London. The City of London is home to financial assets worth more than three times UK GDP, which might seek to flee in the event of severe disruption to the City and could put further severe pressure on the British currency. 

Above: Pound-to-Rand rate shown at weekly intervals with Fibonacci retracements of January 2016 downtrend marked out.

“The UK is not to be outdone by its European counterparts, providing a whopping GBP360bn rescue package which its peers will struggle to match. The behaviour is reassuring for countries that have the fiscal space to do so but less so for economies that are cash-strapped. South Africa comes to mind, especially as Moody’s ratings review looms overhead,” says Nema Ramkhelawan-Bhana, an economist at Rand Merchant Bank

UK asset sales are gathering pace at a time when concerns about the UK’s current account deficit are picking up and the government is preparing to ask markets if it can borrow double-digit percentages of GDP to help the economy cope with the fallout from coronavirus. The current account deficit is often described as the UK’s achilles heel and means that Sterling depends for part of its value on continuous inflows of external capital that might now be drying up or simply overwhelmed by other outflows. Investors appear to be chasing after Dollars and American bonds, with little else getting a look-in.

This has imposed on the Pound losses that were almost as steep as the Rand’s on Wednesday and Bank of England Governor Andrew Bailey has now reportedly told Sky News that he will address recent price action in the currency at the BoE’s meeting next Thursday. The result for the Pound-to-Rand rate has been a 0.31% increase that pales into insignificance when compared with the Rand’s losses to other major currencies. 

"“As the rate of confirmed cases quickens at home and the government scrambles to impose measures to limit transmission, there is a stark realisation that South Africans will require more accommodation than the SARB could reasonably provide," Ramkhelawan-Bhana says.

Above: Confirmed cases of coronavirus in the UK shown at daily intervals. Source: World Health Organization.

“With most of the economies in the Western Hemisphere in some form of shutdown, global growth risks stalling this year (if not GDP contacting), which is negative for the SA outlook. There is not yet any hard evidence of the peak of Covid-19 passing in the Western Hemisphere, or sight of when return to business as usual will be,” says Annabel Bishop, chief economist at Investec. “Africa is evidencing a deepening of the spread of Covid-19, with 3 new countries/territories/areas in the African Region in the past 24 hours...In South Africa there are 116 positive cases.”

The Pound-to-Rand rate has remained, however, comfortably above the 20 handle even after last week’s failed attempt to break above the 50% retracement of the January 2016 downtrend. That attempt saw Sterling briefly trade back above levels that were last seen before the Brexit referendum, although whether it makes a second attempt might depend heavily on domestic coronavirus developments and events on the ground in South Africa. 

South Africa already had a full plate before the coronavirus escaped China’s borders and marched on all four corners of the globe but now it’s facing the prospect of an economically crippling containment effort that takes place in depths of recession and with ratings agencies watching on. A stretched government balance sheet and concerns about the rating agencies could hamper the government's ability to support the economy in the event of a major coronavirus outbreak. Moody’s will decide whether to cut the rating to ‘junk’ at month-end and if it does the Rand's headache could then become a migraine.

Investec forecasts the USD/ZAR rate could hit 17.95 and the Pound-to-Rand rate 22.75 in the most severe scenario for the South Africa's economy. .

Above: Confirmed cases of coronavirus in SA shown at daily intervals. Source: World Health Organization.

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