Rand 'shows soft underbelly to the world'
Cape Town - The rand is expected to have a tough time this week, with a possibility of a new record against the dollar a distinct reality, should data releases go against emerging markets, SA treasury services company TreasuryOne said on Tuesday.
The company expects a very volatile week for the SA market, with further weakness in the rand expected based on the current trend of emerging market sentiment.
Adding to the risks will be Chinese purchasing managers' index (PMI) data due out on Thursday and US non-farm payroll numbers due on Friday.
"If you need to buy dollars, look at levels in the low 13.80s to start entering the market," suggested TreasuryOne.
"After starting last week with much promise, a combination, of speeches made by Fed members, weak Chinese data and the SA Reserve Bank MPC meeting, has made the rand drift out back over the R14.00 level mark against the dollar."
The MPC indicated that they will continue with its “normalisation” strategy, which, in the view of TreasuryOne, almost guarantees a hike in the either November or January.
"The MPC is in-between a rock and a hard place, with them in a hiking phase with very little growth that if the hikes are too steep to quickly, may result in a recession.
But, on the other hand, hiking too slowly may leave South Africa behind the curve and more blood will be spilled in the markets," said TreasuryOne.
It explained that last week was again a case of the emerging market currencies "showing its soft underbelly to the world" as risk averse notions were still driving the markets.
In the shortened week last week, due to a public holiday in South Africa, there was quite a lot to digest in the company's view.
"All the speeches had the same rhetoric, of strength in the US economy and interest rates should be hiked before the end of the year. This is in stark contrast to what Fed chair Janet Yellen said in her initial press conference," TreasuryOne pointed out.
"With the Fed being uncertain, this uncertainty has stayed in financial markets with significant swings every day. In saying that, US revised second quarter GDP beat expectations and this has put a further cat among the pigeons on when the Fed will hike."
Data out of China also didn’t help the cause of emerging markets.
"We can clearly see the Chinese economy is going through a very tough time. The worries due to the Chinese slowdown has caused severe effects in emerging markets and has started to cause ripples in developed economies like the US.
The feeling is that there is still a lot of pressure on the world economy due to the slowdown in China and that emerging markets could well be under pressure for longer than we thought," said TreasuryOne.
"In addition to the already mentioned data out this week, the US needs to pass a budget in the next few days. Otherwise, the US government will shut down. This will further add risks to the market and thus make the market more risk averse than it already is."