Rand recovering slowly

The emerging market currency rout has lost some of its previous impetus, however it does not appear to have fully subsided.

EM central banks have taken action in order to stem the tide of currency-related inflation fears, most of them hiking interest rates to restore some level of credibility and foreign investor confidence at a time when Fed tapering threatens a wholesale reduction in the amount of liquidity being funnelled to high-yield/risk trades. Keeping in mind that one of the triggers for the EM sell-off was weak Chinese growth data in conjunction with the Fed taper, the disappointing overnight data in the form of the Chinese services PMI is not being well received. Risk-off sentiment is being displayed in various manners with one interesting point to highlight here being the VIX volatility index which is spiking up to October highs as the S&P500 corrects lower.

Market participants have been used to subdued volatility measures for the most part of the last few years and now we are starting to see some life as the Fed taper forces many to take a critical look at the buoyancy of many of their investments. A more pronounced correction could further expose the fragilities of many EM deficit offenders which are relying on foreign stock inflows at a time when bond outflows are accelerating rapidly. January’s net bond outflows totalled R22.3 billion, over R3 billion more than the prior record outflow month achieved at the height of the 2008 financial crisis. Daily outflows have averaged over R2.4 billion in the past seven trading sessions and the result will be a rand that fails to find much support despite the extent of its recent weakening.

According to Reuters data (bid chart), the ZAR finished stronger vs. the USD on Friday, closing at R11.1090 from R11.1600 on Thursday. The ZAR strengthened against the EUR, ending at R14.9805 from R15.1274 on Thursday, while similarly strengthening vs. the GBP at R18.2543 from R18.3961 the previous day.

Leave a Comment

Your email address will not be published. Required fields are marked *

Scroll to Top