Rand hits record low on Chinese fears

Domestic political and economic strains also partly to blame, say financial analysts THE rand plummeted to a record low yesterday as global concerns about China’s economy added to investors’ worries about domestic political and economic strains before municipal elections later this year. The rand fell more than 9% to R17.99 against the dollar, by far its weakest level on record, on fears that China wants to weaken its currency aggressively and boost its export competitiveness. The South African currency had recovered somewhat to R16.64 by 5pm, but was still down on Friday’s close. It was the weakest performer in a basket of 25 emerging market currencies tracked by Reuters. The rand has been wobbly since President Jacob Zuma plunged the economy into uncertainty last month by firing finance minister Nhlanhla Nene in what some analysts saw as a sign of strife within the ANC. In an about-face, Zuma removed Nene’s little-known replacement within a week, returning former Treasury boss Pravin Gordhan to the post, but investors are now uneasy over the prospect of undue political interference in economic policy. This was evident yesterday when the rand took one of the biggest currency hits from a wave of global risk aversion spawned by the China worries. “The rand to some extent is reflecting a lot of investor concern surrounding the future of policy-making decisions and given the finance ministry debacle at the end of last year,” BNP Paribas Cadiz Securities economist Jeffrey Schultz said.

Zuma said at an ANC rally at the weekend that financial markets had overreacted to his decision to sack Nene. But critics say his speech was another sign of the government’s failure to tackle structural weaknesses that have kept annual economic growth below 2% for the past five years and have led to credit rating downgrades. Investec chief economist Annabel Bishop said the new low in the rand was due to risk aversion spiked globally by falls in China’s stock market and a wobble in the US‚ with foreign portfolio disinvestment from emerging markets. Japanese markets were closed yesterday due to a public holiday‚ causing more illiquid trade on the day. With Asian markets open earlier than South African markets‚ the rand neared R18/$1 before South African markets opened‚ with Asian rand liquidation positions also reported‚ Bishop said. “The culmination of negative news‚ particularly the liquidation of the previous carry trade into SA from the Japanese yen‚ [saw] the rand record R16.77 to the dollar once SA markets opened [yesterday] and R24.35/£1‚ mainly on the move into safe haven investments‚” she said. Global market rumours of further South African and Brazil credit rating downgrades also influenced the rand negatively. “Global risk aversion has always influenced the rand substantially as it is a highly liquid‚ heavily traded currency‚ with up to a $25-billion [R418-billion] daily turnover recorded. “The carry trade operates heavily in the rand market and so sentiment is a key determinant for the local currency‚” Bishop said. Dow Jones Newswires reported that the rand had lost 30% of its value in the six months since the Chinese market turmoil began.