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Why is the zar weakening?

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Answer # 1 #

The rand weakened to its worst level in three years and yields on local-currency bonds rose as concerns over South Africa’s continuing energy shortage and deteriorating economic outlook intensify among investors.

The currency of South Africa’s weakened as much as 1.1% on Wednesday to R18.8368 per dollar, the biggest loss among major emerging markets to the lowest since May 2020. MSCI’s gauge of emerging-market currencies was 0.2% higher on the day.

Rand-denominated government securities also sold off at the longer end. Yields on bonds maturing in 2048 climbed for a fifth day, the longest streak since August. At 12.2%, they are at their highest since March 2020. Eskom has been implementing rolling blackouts since 2008 to reduce reliance on its ailing power plants. Those outages have intensified in recent years and the country has been subjected to 16 consecutive months of blackouts that can last as long as 12 hours a day. The company said over the weekend it would remove as much as 6 000 megawatts of capacity from the national grid indefinitely.The rand had been stuck in a range of between R18 and R18.50 for about a month, then weakened after news that load shedding would remain at higher levels indefinitely. The pound-rand cross has also shifted, with the pair touching its highest since January 2016 in intraday trade on Wednesday."The power crisis and the associated load shedding means the economy is at risk of stagnation with severe bottlenecks overall in infrastructure and through supply chains," said Erik Meyersson, chief emerging-markets strategist at SEB AB in Stockholm. "Add to this some recent sluggish high-frequency statistics, an acceleration in consumer price inflation, and investors will likely have cause to worry about the near-term economic prospects in South Africa," Meyersson said. South African equities were relatively stable, with the benchmark index up 0.3% by 16:00 in Johannesburg, buoyed by gains in mining shares and tech investors Naspers and Prosus.

Earlier this week, Treasury officials confirmed that a budget surplus was no longer likely for South Africa, predicting a miss of about R27 billion after revenue collections fell short.

Traders in the options markets are beginning to position for further rand losses, even after a US inflation report matched expectations. The currency briefly rebounded off its lows following the data, but soon weakened again. One-month risk reversals climbed for a fourth day, the longest streak in two months.A breach of R18.72 per dollar could see the rand weaken to R19 soon after, said Warrick Butler, head of foreign exchange trading at Standard Bank in a note to clients.

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Answer # 2 #

JOHANNESBURG, May 11 (Reuters) - A sell-off in the South African rand and bonds gathered pace on Thursday, as news reports that South Africa had provided arms to Russia spooked investors already concerned about the economic impact of crippling power cuts.

The rand touched a low of 19.3250 against the dollar, down as much as 2.4% on the day and hitting its weakest since the record low set on April 6, 2020, early in the COVID-19 pandemic.

By 1553 GMT the rand had pared some of its losses to trade around 1.6% weaker than its previous close.

"Today will go down as a historic day for the (rand) as the perfect storm hit," Kieran Siney of ETM Analytics said in emailed comments, citing news reports about the alleged arms shipment to Russia, intensifying concerns over power outages and dovish comments from a central bank deputy governor.

Local news website News24 cited the U.S. ambassador to South Africa as saying that Washington was confident that a cargo ship that docked near Cape Town in December had loaded weapons and ammunition before the ship went back to Russia.

Traders and analysts said they were concerned that South Africa could face Western sanctions if it was found to have supplied Russia with weapons while Moscow was waging war in Ukraine.

Asked by an opposition lawmaker in parliament about the News24 report, South African President Cyril Ramaphosa said: "The matter is being looked into."

Asked about the power crisis which sees many South African households and businesses go without electricity for more than 10 hours a day, Ramaphosa rejected a lawmaker's suggestion that his government had failed to address the issue.

Experts predict longer outages deeper into the southern hemisphere winter.

"Foreign investors are worried that our economy will be badly affected by the load-shedding," said Greg Davies, head of wealth at Cratos Capital, using a term for power cuts.

"It's getting bad now because we need to buy dollars to pay for diesel and that will be getting much more expensive with the rand now being so weak to the dollar."

Shares on the Johannesburg Stock Exchange also tumbled, with the blue-chip index (.JTOPI) ending the day down around 1%.

South Africa's sovereign dollar bonds fell as much as 2.6 cents in the dollar. Longer-dated maturities fell the most, with the Eurobond maturing in 2047 down as much as 2.645 cents in the dollar .

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Answer # 3 #

The rand had been underperforming its peers even before the report as investors fretted over the country's struggles with energy shortages and China's growth hiccups. Mixed data from China have worsened the outlook for South Africa's exports, while crippling power outages are threatening to erase any growth this year.

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Debbi Hsueh
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