Why the rand is under pressure again

Demand for dollars has driven the rand above R17.00, and it didn’t stop there in trade on Monday morning (3 August), with the Absa Purchasing Managers’ Index highlighting worrying features around production and employment in South Africa.

The rand touched its weakest level in over three weeks at R17.09 on Friday, as risk aversion grew driven by pessimism over a quick recovery in the US and global economies, said TreasuryOne in a morning note.

“The unabated rise in Coronavirus cases and continued tensions between the US and China are the main concerns for investors,” it said.

With 8,195 new identified cases, South Africa now has 511,485 people who have contracted Covid-19, said health minister, Dr Zweli Mkhize, on Sunday evening. The country recorded 213 deaths on Sunday, bringing the death toll to 8,366.

“A rebound in the dollar late last week saw the rand give up significant ground, as markets continue to dwell on uncertainty regarding trade tensions, US elections and recovery, as well as rising virus numbers, said Bianca Botes, executive director at Peregrine Treasury Solutions.

The rand closed last week at R17.00 against the dollar, but has since softened  further in mid-morning trade on Monday (3 August):

  • Dollar/Rand: R17.27  (1.15%)
  • Pound/Rand: R22.58  (1.05%)
  • Euro/Rand: R20.30  (0.97%)

Data from Absa Purchasing Managers’ Index (PMI) for July, showed a slight decline compared to the previous month but continued to signal a further month-on-month improvement for conditions in the manufacturing sector.

The PMI declined to 51.2 index points in July from 53.9 in June, staying above the neutral 50-point mark for a third consecutive month.

“This suggests that official manufacturing output should still reflect a month-on-month improvement in activity, but that levels are stabilising and that July’s increase is likely to be significantly less than those signalled by the PMI for May and June,” it said.

Despite ticking down slightly, the business activity index remained at an elevated level in July. This was despite a bigger decline – albeit still signalling a further monthly improvement – in the new sales orders index.

“The fact that more respondents signalled a further increase in output compared to those seeing further growth in demand, could perhaps be explained by some firms producing more in an attempt to catch up on production lost during earlier stricter lockdown levels,” Absa said.

Despite sharp monthly improvements, some respondents noted that output remained below pre-lockdown levels.

“This means that, on an annual basis, the official output is still expected to be down in July. On a positive note, respondents reported a slight increase in export sales for the first time since October 2019.”

Absa said that a very worrying feature of the latest PMI survey is that the employment index remained particularly weak and, unlike the demand and activity indices, has barely recovered from the sharp plunge in April.

“Formal-sector employment tends to lag activity trends. The PMI employment indicator suggests that further job losses are likely after an initial hit to employment expected in the second quarter,” it said.

In earlier sessions, the rand had tracked gold’s sharp rally.

TreasuryOne said fin its note that gold hit another record high in early Asian trade on Monday morning, touching $1,984 before settling back to $1,976.

“Gold’s safe-haven status along with falling US Treasury yields and a soft dollar could still see the yellow metal hit the $2,000 mark in the short term,” it said.

Nedbank said in a note that the rand could trade in a broad range of between R16.80, and R17.35.

Read: New proposal to give basic income grant to young unemployed South Africans

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