South Africa’s woes hit the rand to lows

FEARS that miners’ strikes are having an impact on the broader South African economy have dragged the rand down to three-year lows against the US dollar. With industrial action threatening to creep into other sectors, the outlook is bleak for the economy and is reflected in its currency.

The rand is seen as a gauge of emerging market strength. South Africa is one of the world’s leading mining and mineral-producing economies, and the combination represents approximately 60 per cent of South Africa’s exports. But the rand has been suffering recently: slowing global demand – particularly from emerging markets like China – has dragged on exports, putting downward pressure on the rand.

South Africa’s 2.6 per cent forecast for GDP growth now looks to be in jeopardy. Up until recently, domestic demand was holding up well, which helped to offset the loss in exports. But the fallout from industrial action could extinguish this flame.

Traders should factor in weak economic performance in the third quarter and, if the situation does not improve in the short term, the final quarter too. At a time when South African unemployment is already at an eye-watering 25 per cent, Sven Richter of Renaissance Capital says that we may see further strains on the jobs market as a result of the industrial action: “As corporations see what is happening, they will start controlling their wage bills more tightly,” and will be discouraged from adding to staff levels.

Ironically, the weakness in the rand may help boost demand in the medium-term for the very commodities whose production is being crippled by strikes. Richter says: “I am not too worried about a weakness in the rand. We could see it fall down to 9.5 rand per dollar before strengthening, which I am comfortable with.”

Richard Wiltshire of ETX Capital believes that, although “recent rand losses may be overdone, the currency is still in trouble in the near term against the dollar”. From a price perspective, dollar-rand has shown a bullish breakout, but Angus Campbell of Capital Spreads says “there is a high degree of uncertainty”. Regardless of the latest unrest, the rand has been depreciating against the dollar for some time and “the technical trends point to further weakness”.

Yesterday, news emerged that some freight workers ended their strike, but Wiltshire says that “any positive news is likely to be a concern for the ‘late to the party’ rand shorts” who only took positions due to the recent negative headlines. The lesson for traders is to proceed with caution. Richter says that the currency is one of the most volatile in the market and traders should “be extremely careful. The rand can turn against you very quickly.”