If South Africa continues to support Russia to the extent that it justifies sanctions from the West – or if load shedding continues to worsen – we can expect to see the rand weakening even further than its current levels, says Harry Scherzer, the CEO of Future Forex.
However, if the diplomatic matter with the US can “fizzle out”, the currency could recover, he added.
Scherzer said that the government has vehemently denied accusations by the US ambassador that South Africa supplied arms to Russia, and if they can’t be proven, the issue may fizzle, and the rand may recover over time.
According to the CEO, however, investors may remain spooked by the government’s cosy relationship with Russia and will continue to exercise caution around the country’s investments, especially if there continue to be unwise decisions made by the government.
When looking into where the volatile rand may end up, Scherzer said that investors and South Africans alike must keep an eye on diplomatic matters as well as global risk sentiment, such as US interest rates, in an attempt to gauge the rand’s trajectory.
Although the rand is directly tied to the performance of the US greenback, domestic factors are the main driving force of the unit right now, with load shedding driving down economic growth expectations and international diplomatic blunders adding fuel to the fire.
The rand reached its lowest point on record last week (12 May), battered by several negative factors, including the SA-USA diplomatic tensions, worries over more severe load shedding, and talk of local recession.
The Bureau for Economic Research (BER) stressed that other emerging currencies, although facing similar challenges in terms of international markets, are not experiencing the same level of currency depreciation as the rand.
The depreciation of the rand is not solely linked to the US dollar but also to the pound and the euro, said the BER.
Last week, the rand witnessed a 5% drop against the dollar, a 3.5% decline against the pound, and reached a record low against the euro, marking its lowest value since 2016, the group added.
Speaking on the Russia diplomacy debacle, Rand Merchant Bank analysts said that panic has eased to a large degree; however, new issues, such as delays at the country’s only nuclear power station, have emerged as a negative for the load shedding problem, reported Reuters.
Additionally, retail sales data for March showed a 0.7% year-on-year decline, adding to poor sentiment around South Africa and the rand.