The rand’s 9% plunge in the past month may be just the beginning for the South African currency, whose resilience is being tested by fears of a US recession even as local fundamentals remain supportive.
History shows the rand tends to weaken sharply when the world’s economic engine is in recession. Skipping the broad Covid-related slump in global markets in 2020, the US recessions of 2008/9 and 2001 knocked as much as 13% off the rand’s value. Based on Bloomberg scenario-planning tools, similar conditions this time around could see the rand weaken by about 12%.
“They won’t escape tightening financial conditions, recession fears and de-risking, even if the long-term fundamental picture is likely to remain supportive.” The rand is down 3.3% this half, reaching a 20-month low of R16.96 per dollar on Friday. The Bank of America strategists see it extending the decline to R17.20 per dollar.
“The relationship between oil and the rand takes the shape of a smile, with a ‘sweet spot,’ or inflection point, where the level of oil or the underlying economic conditions represented by oil are optimal for the currency,” Nedbank analysts including Reezwana Sumad said in a note to clients. “A lower oil price suggests a weaker rand exchange rate; vice versa for a higher oil price.”
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