The eurozone remains South Africa’s largest trading partner and so the rand often dances to the euro’s tune. And that tune at the moment is the blues.  

To wit, the rand has now sunk to its lowest level against the greenback since October 2020, plumbing 16.75/USD on Wednesday afternoon. This is largely because the euro is at 20-year lows and late on Wednesday was almost at parity with the dollar on mounting concerns that Europe’s economy is tipping into recession. Russia looks set to cut off Europe’s gas supplies, a geopolitical move that will send tremors around the world. 

Not that the rand needed much of a push. At the moment, it really has hardly anything going for it.  

For one thing, there is a growing consensus that South Africa’s economy may be falling into recession itself right now, based on the data so far from the second quarter (Q2) and the rough start to the current quarter which began last week.  

Stage 6 load shedding was the last thing this economy needed. Consumer confidence was at its second-lowest level in more than three decades and business confidence was fading before the onset of Stage 6. That will simply erode confidence further and one of the many things that can be gleaned from the rand’s performance is that it is often a measure of confidence.  

Commodities

The commodities cycle — which has been propping up the rand — has also turned bearish in the face of jitters about Chinese and global growth. Palladium on Wednesday was fetching $1,965 an ounce,  according to Johnson Matthey data, well down from a peak of $3,340 scaled in early March. Iron ore prices are slumping and the gold price is down by more than 13% from recent peaks reached in March, according to the World Gold Council.  

Scorching commodities prices kept South Africa’s current account and trade surpluses in healthy and even record surpluses, providing the rand with a foundation of support which is now starting to crumble. 

The coal price remains perky, but Transnet’s woes mean South African exports are constrained. And while oil prices are cooling, the rand’s tumble against the dollar at a time when retail pump prices are at record highs will keep fanning the flames of fuel inflation.

None of this will be lost on the South African Reserve Bank’s Monetary Policy Committee, which meets later this month for its next rate decision. Another hike is on the cards, and the only question is how big it will be — and will it be enough to shore up the volatile rand? DM/BM