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The rand: a perfect storm

Dr Chris Harmse is an economist at CH Economics. Photo: File

Dr Chris Harmse is an economist at CH Economics. Photo: File

Published Dec 1, 2021

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THE rand exchange rate, especially against the dollar continued to depreciate at an alarming speed, especially on Thursday and Friday.

The currency traded on R14.40 to the dollar on October 20, a mere month ago. Since then, it lost R1.80 or 12.5 percent to levels of around R16.20 on Friday. It depreciated with 50 cents alone on Thursday and Friday.

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On Friday, the rand traded at its weakest level since the lockdown at the beginning of March 2020 against the pound at R21.63, as the currency lost 50 cents during the day. The rand depreciated the most against the euro, losing 60 cents alone on Friday.

Although the news of the latest Covid-19 variant B1.1.1.529 (that still must be baptised) sent shock waves throughout the world, given that it was first detected in South Africa, especially the JSE (equities) and the foreign exchange markets suffered the most. The all share index lost almost 2 000 points on Friday, after reaching a record-high level last week of 71 055 points. The index closed on Friday at 68 614 points or 3.4 percent lower, within three days.

The strong negative movements in the rand can be seen as the almost perfect storm to hit the currency market over the past month. The storm started with the first announcement in October by the Federal Reserve that it intended to start tapering down its purchases of US securities in the market. This after the US inflation rate accelerated to above 5 percent (5.4 percent) during September for the first time since 2011.

Emerging market currencies started to be vulnerable with the dollar as a safe haven strengthening strongly against these currencies. The storm intensified with the announcement that the US inflation rate had accelerated even further to 6.2 percent in October. The euro area published its inflation number for October, announcing that it had increased to 4.1 percent… its highest level since July 2008. The UK is experiencing the same trend as its inflation rate jumped to 4.2 percent in October, the highest since December 2011. In reaction the rand easily broke through R15.50 to the dollar level on November 17.

The announcement by the Monetary Policy Committee (MPC) this month that it increased the repo rate by 0.25 percent could not prevent the depreciation cycle of the rand. In fact, foreign investors and holders of South African bonds went on a selling spree. Commodity prices, especially gold and platinum also stared to dwindle, pushing the rand to levels around R15.75 to the dollar on Friday.

The storm intensified further on the news that South Africa’s producer price index had risen further in October to 8.1 percent, up from 7.8 percent in September. Coke, petroleum, chemical, rubber and plastic increased by 17.5 percent year-on-year, while food products, beverages and tobacco products increased by 5.6 percent year-on-year. This figure, as well as the massive increase in fuel prices this month could contribute to an expected sharp increase in the inflation rate (CPI), and the rate might even go higher than the upper target level of the MPC of 6 percent.

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Domestically, this coming week investors will concentrate on the release of South Africa’s unemployment rate data by Stats SA during third quarter, tomorrow. It is expected that the jobless rate has increased further from 34.4 percent in quarter two to 35.6 percent in quarter three. Today the Reserve Bank will announce the latest money supply and private credit extension data, and on Friday the IHS Markit Purchasers Managers Index (PMI) for November is due to be released.

Dr Chris Harmse is an economist at CH Economics.

*The views expressed here are not necessarily those of IOL or of title sites.

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