South Africa’s rand was on track for its worst week in eight months as a sharp slowdown in economic growth and concerns over the independence of its central bank weighed on the currency.
The rand was down 0.8 per cent at R15.12 to the dollar in morning trading on Friday, taking its fall this week to 3.7 per cent, its largest weekly drop since October.
The fall came despite rising expectations of monetary easing by the US Federal Reserve, which have rippled across developed markets, and boosted other emerging market currencies on expectations of wider interest rate differentials.
Treasury data released on Tuesday showed that South Africa’s economy contracted 3.2 per cent in the first quarter on an annualised basis, having slid into recession last year. Severe power shortages triggered by crisis-ridden state utility Eskom have worsened the slowdown in Africa’s most industrialised economy.
“The sell-off was triggered by significantly weaker gross domestic product data published earlier this week. The much sharper contraction in first quarter GDP reminded the market that President Ramaphosa and his administration face a tremendous challenge to address structural issues of the South African economy,” said Piotr Matys, FX strategist at Rabobank.
“Near term, we expect the rand to underperform peer currencies and expect limited support against the dollar despite the significant re-pricing in Fed rate expectations recently.” said analysts at Barclays. “We believe the South African economy remains extremely vulnerable to escalating trade tensions and a slowdown in global growth.”
Investors have also been unnerved by potential threats to the independence of South Africa’s Reserve Bank, whose mandate is enshrined in the country’s constitution.
“Renewed debates about the central bank’s mandate and independence are also putting pressure on the rand. The events illustrate that the deep divisions within the ANC on this matter continue and constitute a continuous sword of Damocles for the South African currency”, said analysts at Commerzbank.