The rand is having a great week – but all eyes are on China for the next move

3 years ago 1

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The South African rand is experiencing a sizeable rebound against the US dollar as markets anticipate the United States to start tapering its rate hikes.

However, the market is experiencing some jitters as investors look to the world’s second-largest economy, China, for the direction of its next move against Covid-19.

Speaking to Newzroom Afrika, executive director at Citadel Global, Bianca Botes, said that the rand has been enjoying a decent rebound against the dollar, dipping below R17 to the dollar last week and maintaining levels around R17.14 to the dollar on Monday (28 November).

While the rand is now back above the R17/$ mark, it is still well below the R18.00 to R18.50 levels seen in recent weeks.

The main driver behind the rand’s movements – as has been the case for much of the year – are markets taking direction from the US Fed and its position on rate hikes in the States.

Currently, all the focus is on the possibility of the Fed tapering its aggressive hike cycle, Botes said, with markets holding the bullish view that inflation has peaked and the Federal Reserve will be less hawkish in its tone on hikes.

Markets are expecting a hike in December of 50 basis points. This has led to a general risk-on position in the market, which has benefitted currencies like the rand.

However, the market is still experiencing jitters because of events in China, Botes said, which runs the risk of reversing the rand’s gains if things go south.

China has registered record levels of new Covid-19 infections and is implementing various zero-Covid strategies to try and eradicate, rather than control, the virus. This has led to widespread backlash from the Chinese people, who have taken to the streets to fight back against restrictions.

Botes said that both the record levels of infections and the civil unrest are unprecedented and have markets on edge to see what happens next.

“It’s not a pretty picture for emerging markets,” Botes said, adding that the bull trend currently experienced by emerging markets could reverse if things in China play out poorly.

The market will be looking to see how the Chinese government responds to protestors and how it responds to the continued outbreak. If lockdowns in China continue – as they have since the outbreak began at the start of 2020 – then not only will industries slow down but so too will the people suffer.

This will have a knock-on effect on all of China’s trade partners, including South Africa, Botes said, as supply chains will be impacted, travel and trade will be restricted, and this can lead to shortages and higher inflation – which is already been felt in China.

The effects of the China problem are already being felt in global markets. As a high consumer of commodities, the Chinese lockdown is already impacting oil prices, which have plunged on prospects of weaker oil demand.

This comes at a time of greater fuel demand in markets such as the US and the European Union.

Local factors, such as ongoing load shedding and interest rate hikes announced by the South African Reserve Bank last week (24 November), have had little impact on the rand as they are largely priced into the market.

The holding of South Africa’s credit rating at BB- with a stable outlook by Fitch Ratings was also barely a blip on the radar.

According to the Bureau for Economic Research, the holding of the rating suggests that despite South Africa’s much improved public finances relative to what was expected 12 months ago, an outright credit rating upgrade from Fitch is unlikely in the foreseeable future.

Risks, meanwhile, are on the downside, with ongoing tensions between labour unions and the government over wages risking a budget blowout if demands of 10% increases are met.

On Monday afternoon, the rand was trading at these levels against major currencies: