Panicked rand breaches R17/$ as investors await Reserve Bank decision

Picture: REUTERS
Picture: REUTERS

On the eve of the SA Reserve Bank's crucial monetary policy meeting, the rand crashed through R17/$, to its weakest level since January 2016, as the global selloff in markets sparked by the coronavirus accelerated.

On a closing basis, the currency is set for a record low against the dollar, caught up in demand for the safest assets and dumping of those that are perceived to be risky.

The rand breached R17.00/$ “with ease as the sell-off on the back of the Covid-19 virus pandemic continues to wreak havoc across financial markets”, Bianca Botes, treasury partner at Peregrine Treasury Solutions, said in a research note.

“As the world braces for the anticipated global economic fallout of the pandemic, the continued sell-off also saw bond yields skyrocket, as investors unloaded SAand other emerging-market assets in a bid to de-risk their holdings.”

The currency slide will add more complications for governor Lesetja Kganyago and the rest of the monetary policy committee (MPC) as they contemplate how much stimulus they should give to an economy that was struggling even before the virus outbreak.

An aggressive cut may risk more outflows from the country, especially if it loses its last remaining investment-grade rating later in March. That will, in turn, lead to an even weaker rand and higher import prices, risking inflation down the line. Some analysts say that weak demand and oil prices below $30 a barrel will alleviate inflationary pressures.

The country's cost of borrowing for a decade are at the highest in about 18 years, another factor that might make the Bank cautious. Bond yields, which move inversely to the price, could surge further if Moody's Investors Service downgrades the country — a move that could see foreign investors dump the country's assets as they fall off global indices.

The rand dropped as much as 2.9% to R17.1052, and was 2.1% weaker at R16.9685/$ at 3.15pm. The country's generic 10-year bond yield was at 11.47%. The euro dropped to its lowest level since late February against the dollar while the pound reached levels not seen since 1985.  

Money markets are pricing in a 50 basis-points cut in the repo rate, according to Bloomberg.

The JSE all share had dropped as much as 7.2% to its weakest level since June 2013. It is down 32% in 2020 so far.