Why is the rand so weak at the moment?

It has been one way traffic this week so far for emerging market currencies including the rand, as the dollar strengthens with rising US Treasury yields.

Global risk off catalysts

Market angst from an international front is rife at the moment driving a near term negative sentiment. Short term global catalysts sparking the diminished appetite for emerging market assets such as the rand include: China’s Evergrande debt debacle and fear of contagion, the US debt Ceiling and slightly more hawkish Federal Reserve.

Domestic cause for near term ZAR underperformance

The rand has however been underperforming even its emerging market currency peers, perhaps due to a soft Quarterly Employment Statistics (QES) report released by Statistics South Africa (Statssa). There was a short term acceleration in ZAR depreciation at around 11:30am (Tuesday 28 September) when the report was released. This has resulted in a very near term underperformance of the domestic currency relative to the likes of the Russian Ruble, Brazilian Real, Turkish lira, Mexican Peso, Indian Rupee and Chinese Yuan.

The QES report showed that total employment decreased by 0,9% quarter-on-quarter. The decline in employment over the quarter was led by the community services, manufacturing and construction sectors. The mining and transport industries did however show a marginal increase in the number employed.

Rand sympathy with commodity prices

South Africa’s is a major commodity exporting nation, lending itself to rand sensitivity relative to commodity prices. Major commodity exports include minerals, precious and base metals. China is South Africa’s largest export partner accounting for nearly 10% of total exports. Lower production limits and emission controls in China have weighed on commodity prices, while the Evergrande story threatens the financial system, economic recovery and in turn demand side assumptions. This is further weighing on the rand at present.

A perfect storm

For the time being the ZAR is balancing local data against a plethora of global events and movements in commodity prices.

Risks for further ZAR weakness over the near term include, a more aggressive (hawkish) Federal Reserve with regards to scaling back stimulus (and guidance towards hiking rates), a US government shutdown (if Senate doesn’t raise the debt ceiling in time) and an escalation in the Evergrande crisis (and its contagion effect).

Inversely catalysts for renewed strength in the domestic currency could be a more dovish Federal Reserve, aversion or short lived of a US Government shutdown and further support for the financial system from Chinese authorities. There is little in the way of high impact domestic data points scheduled until around the middle of October.

USD/ZAR – Technical analysis

The USD/ZAR is currently breaking above the R15/$ mark. A close above this level assumes R15.35/$ and R15.50/$ as further upside targets from the move.

Traders who find long entry into the breakout (should it confirm with a close above R15.00/$), might use a close below the R15/$ as a stop loss indication for the trade.

In summary

Emerging market currencies are weaker amidst short term risk aversion

Global catalyst for the negative near term sentiment include concerns over a US Government shutdown, a more hawkish Federal Reserve and China’s Evergrande threat of default and contagion

The rand has underperformed its emerging market peers following the Quarterly Employment Statistics report

Weaker commodity prices have also had a negative influence on the ZAR

In the near term we are seeing an upside breakout of the R15/$ level