By Matthew le Cordeur
Cape Town – The rand lost almost 1% of its value against the dollar on Monday amid an American long weekend that has seen traders move away from risky emerging market currencies.
“The liquidity in the market is very thin today, because of the 4th of July long weekend in the US,” Wichard Cilliers, director and head of dealing at TreasuryOne, told Fin24.
“This has caused a lot of position squaring in the market with a bit of a risk off scenario.
“Emerging market currencies, along with gold, have taken a bit of a beating this morning,” he said. “Gold is down $10 and USD:ZAR has lost some 12c. Other currencies is also losing ground as the USD is on the front foot this Monday.”
By 13:00, the rand was trading 0.8% lower at R13.19 against the greenback. Gold is at its lowest level since May 16. South African bonds were also weaker by noon.
Global policy tightening and rise in yields weaken rand, knocking hope of rally
Global policy tightening is weakening the rand, with analysts voicing concerns that the market has given up hope that the emerging market currency’s rally will continue.
“The rise in global yields has added to the pressure on the rand,” said Rand Merchant Bank analyst John Cairns in a note on Monday.
“Last week’s comments by global central bankers, ECB (European Central Bank) president Draghi most importantly, gives the impression that global policy tightening will continue even with the sharp drop off in inflation.
“US 10-year Treasury yields rose from 2.13% to 2.30% in the week, the biggest weekly increase in almost four months. All EM currencies have wilted under this pressure as capital inflows have dried up.”
Cairns said sentiment on the rand has definitely shifted.
“USD/ZAR repeated failure to sustain moves below 13.00 has seen the market give up on hopes that the 2016 rally in the rand will continue,” he said. “Price action now indicates that the market wants to push the pair in the other direction.”
However, he said traders shouldn’t push the rand weakness too aggressively.
“The only other risk assets that have come under meaningful pressure are other emerging market currencies, but their weakness has not been as large as in the rand and this will act as a break even if rand underperformance is not yet extreme,” he said. Â
In a morning note, TreasuryOne dealer Gerard van der Westhuizen said emerging markets are facing pressure with global yields rising and thus drying up capital inflows.
Van der Westhuizen said the rand managed to strengthen by almost 3% since President Jacob Zuma reshuffled his Cabinet and removed Pravin Gordhan as finance minister, because “high yields on bonds kept the markets interested despite the negativity surrounding political and economic issues”.
“This seems to be the only supporting factor in what looks like a gloomy picture currently painted over the future of the local currency,” he said.
“Over the past couple of days, we have however seen a selloff in our local bond markets as the European Union shows signs of economic growth and investors start leaning towards developed markets.”
