South Africa’s rand set a new record low against the dollar on Friday as investors focused a fresh on the possibility of more Federal Reserve interest rate hikes after stronger-than-expected U.S. jobs data. Stocks inched up only slightly.
Before the release of the U.S. jobs data, the rand had gained more than half a percent as Chinese markets steadied, reviving investors’ appetite for risky assets. But the gain proved short-lived after the data, leaving the rand with its weakest ever opening week of the year. The dollar index, which measures the greenback against a group of six currencies climbed after the stronger-than-expected data and was last up 0.5% at 99 792.
Emerging market assets had suffered on Thursday as traders saw a drop in the yuan as evidence of wider economic weakness in China, the world’s biggest consumer of commodities. “The rand is seriously undervalued and that we know,”Nedbank Private Wealth’s senior portfolio manager Graham Ledbitter. “At the moment the dollar is rampant, and like a wine cork in a turbulent ocean we’ve got no control over our direction.” At 1526 GMT, the rand traded at 16.1700 to the greenback, a 0.53% fall after reaching an all time low of 16 2150. Government bonds on the other hand bucked the downward trend, with the yield for the benchmark maturing in 2026 shedding 9 basis points to 9.525%.
The rand could be between R18.37 and R19 against the dollar by the end of 2016, Peter Attard Montalto, emerging markets economist at Nomura, said on Friday. This is an adjustment of Nomura’s previous expectation of the rand at R16 to the dollar by the end of 2016. The key factor regarding the rand remains what he calls “the negative narrative” against the backdrop of the country facing a downgrade, a widening current account deficit, capital flight and looming rate hikes in the US and China. His analyses indicate that emerging market currencies are likely to underperform against the dollar in 2016 as a whole and that the rand, on top of that, is expected to underperform against its peers.
“We are in uncharted territory here. While forecasting foreign exchange is a constant challenge, it is doubly so when the currency is beyond all-time weak levels in nominal terms,” cautioned Montalto. “We pencil in R20 to the dollar for the end of 2017 on the assumption that most of the domestic story will be out of the way by then.”