The South African rand dropped to a six-month low on Friday in a latest round of emerging-market weakness on the back of a stronger dollar. After sharp selloffs in other emerging-market currencies, analyst now wonder whether the rand is simply the next shoe to drop.
In Friday trading, the U.S. dollar rose back above 13 rand
for the first time since December, when South Africa was facing uncertainty about its political future. Since then, President Jacob Zuma, who faced accusations of corruption and was known to be rather fiscally irresponsible, was replaced by the market-friendly Cyril Ramaphosa. Now unwinding the optimistic positions that had been put on upon Ramaphosa’s arrival is weighing on the rand.
“A break of the 13.40 area is needed to set up a test of the November high near 14.5740,” read a note from Brown Brothers Harriman.
“I think rand weakness reflects a broad repricing of EM assets within a context of rising U.S. interest rates,” added Win Thin, global head of emerging-markets foreign exchange at BBH, in emailed comments. Moreover, weaker-than-expected first quarter GDP, which, when reported Tuesday, showed an economy expanding by only 0.75%, compared with the FactSet consensus estimate of 2.6%, may have triggered the selloff.
Plus, the South African Reserve Bank was the least likely to raise interest rates in response to the current conditions, Thin said. Monetary-policy makers at the central bank are due to meet on July 19, more than a month away, and “a lot can happen between now and then,” cautioned Thin. “The economy is very weak, and so we don’t think there is much appetite to hike if they can avoid it.”
But to speak of “contagion” across emerging markets is to ignore idiosyncratic factors at play in the various countries, he said. “Rather, weakness really is concentrated in the weaker [ones], as it should be.”
The best performer, the Colombian peso
, is looking at a more than 4% gain since the start of the year, according to FactSet for example.
Indeed, the dollar resurgence has so far only triggered localized sharp selloffs, such as in the Turkish lira
and Argentina’s peso
. But “we cannot rule out stress to other EM currencies if things go south,” wrote Bank of America currency strategist Vadim Iaralov.
“The dollar rally is about to take its toll on emerging-market currencies, according to our weekly moving-average aggregator,” Iaralov said. “EM FX has topped out the week of April 6 when the dollar broadly descended against most pairs as investors kept buying emerging-market currencies at that time.”
Since then, the buck has rallied and the ICE U.S. Dollar
, which measures the buck against a basket of six developed-market rivals, appreciate some 3.8%, according to FactSet.
“In addition, the Japanese yen
is already peaking like in previous EM FX selloffs,” Iaralov wrote. “Past episodes have taken four to six months to unwind trough to peak, suggesting the risk is for the dollar to rally into the U.S. midterm elections.”
That could mean a lot more pain for the rand, but also in peers like the South Korean won
and also the euro
, which is, while not an emerging-market currency, the dollar’s main rival, Iaralov cautioned.