Take one glance at intraday currency moves and you’ll see that volatility is up in a noticeable and pervasive way. There are many expressions of risk in the foreign exchange market at present: the persistent and increasing strength of the US Dollar is symptomatic not just of the increasingly hawkish repricing of Federal Reserve interest rate expectations and month end flows but it is also down to the rising risk environment. But perhaps one of the best barometers of risk is the emerging market basket.
Emerging markets share many characteristics but have different sensitivities to their shared stimulants. Those highly cyclical and more fiscally leveraged economies typically exhibit a greater sensitivity to risk conditions. Within that basket, the South African Rand stands out as a highly risk-sensitive currency. The Rand has suffered against a rising US Dollar and several domestic factors have also been at play to encourage short-Rand flows within the market.
The market was well aware of the state of Eskom and the fragility of power provision in South Africa moving into the last few months, particularly amidst challenging global wholesale energy market conditions. The coal market upon which much of South Africa’s power production relies has not been immune to the challenges that Russia’s invasion of Ukraine has brought. However, as we highlighted, the relative calm in markets was likely overlooking just how damaging loadshedding could be in the current economic environment to South Africa’s economic and financial position.
The devastating and deadly flooding has also added to a pessimistic economic outlook for South Africa with the severe flooding that has taken place in the economically significant province of KwaZulu-Natal also undermining the Rand. Last week, in the midst of the sell-off in the ZAR there was speculation that a real money flow driven by a major asset disposal by Barclays from its shareholding in ABSA Group Ltd was also contributing to the currency’s woes. A stake worth some $687M was sold by Barclays in the banking group with speculation that the proceeds would be converted into hard currency adding to the supply of Rand in markets. So far the Rand has yet to establish a new stable level on its major crosses with the relentless USD into month end continuing to undermine Rand sentiment.
Discussion and Analysis by Charles Porter