Persistent Pressure on the Rand
In the past week, the South African rand has once again faced significant challenges, approaching the psychological threshold of R20.00 against the US Dollar.
This increasing pressure comes in the wake of surging bond yields, which have exacerbated the currency’s volatility.
Despite reaching a high of approximately R19.64 against the US Dollar, it has retraced to around R19.36. The rand’s performance against the GBP has also been lackluster, with highs near R23.83 before stabilizing at R23.65.
US Nonfarm Payrolls Impact
The heightened volatility of the rand can be attributed, in part, to the US nonfarm payrolls (NFPs) data, which exceeded analyst estimates by a significant margin.
The NFP figure of 336,000, compared to a consensus estimate of 170,000, reflects a robust US economy. This bullish outlook for the US Dollar suggests the possibility of prolonged elevated interest rates, driven by persistent inflationary pressures.
Fiscal Challenges and Negative Sentiment
South Africa’s fiscal situation remains a prominent concern, casting a dark shadow over the rand’s performance.
The Medium-Term Budget Policy Statement, scheduled for November 1st, is expected to shed light on the country’s fiscal woes, potentially leading to a further deterioration in sentiment towards South Africa.
Dollar’s Resilience and Emerging Market Outflows
The strength of the US Dollar, exemplified by the robust performance of the Dollar Index (DXY), has been a recurring theme.
While the DXY reached a peak of 107.35 before retreating to 106.25, the sustainability of this trend remains uncertain.
Rand proponents hope that the DXY has reached a local peak to avert the risk of a freefall.
The recent risk-off sentiment among investors has bolstered the US Dollar’s appeal as a safe-haven asset, amplifying its strength.
Emerging Market Challenges
Emerging market outflows have emerged as a dominant trend, with foreign divestment from South African stocks gaining momentum. This trend has resulted in a 1.7% decline in the FTSE/JSE all share index over the past week.
Furthermore, investors have withdrawn a substantial $3.12 billion from US exchange-traded funds focused on emerging markets, a significant increase compared to the previous week’s $611.7 million outflow.
These outflows underscore investors’ risk-averse stance, further bolstering the US Dollar and contributing to the depreciation of emerging market currencies.
Local Manufacturing Challenges
Closer to home, South African manufacturers have faced substantial challenges, as highlighted by a sharp drop in the ABSA manufacturing Purchasing Managers’ Index (PMI).
The ABSA manufacturing PMI declined by approximately 10% or 4.1 points to reach 45.4. This decline can be attributed to persistent rolling blackouts, soaring fuel prices, and weakened demand for exports, particularly in Europe.
Upcoming Market Events
Looking ahead, several key market events are on the horizon, including the release of FOMC minutes, PPI data for September, inflation rate figures for September, GDP data for August (GBP), and the preliminary Michigan consumer sentiment for October (USD).
These events will likely influence the direction of currency markets, including the South African rand.