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The rand is underperforming its peers and this is why

The rand is a victim of a global dollar-liquidity squeeze.

South Africa’s rand slumped on Friday, leading emerging-market currency declines as investors took flight from riskier assets.

The South African currency is a victim of a global dollar-liquidity squeeze, with US rates rising as the Federal Reserve tightens policy, according to Nedbank.Weak economic data this week has convinced investors that South Africa’s central bank won’t raise rates to support the rand.

This is what analysts are saying about the currency’s retreat:

Nomura International

Rand weakness has been aggravated by bond and equity outflows, Henrik Gullberg, executive director for emerging-market trading strategy, wrote in a note to clients “The rand’s outperformance gap versus the rest of emerging market currencies is all but closed now. Rand underperformance from here on will not be a function of it catching up with broader emerging-market currency weakness. This would suggest more focus on domestic factors from here on”

Manulife Asset Management

“I think this correction is healthy, as long as it doesn’t get out of hand, because the country was beginning to lose competitiveness,” said Senior Analyst Richard Segal. A move above 14 in the short term would be overdone The rand’s marked weakness compared to its peers could be attributed to “the surprisingly weak gross domestic product data the other day, along with the increasingly fragile international environment, and the Reserve Bank policy of not intervening” “Uncertainties about land reform and the mining charter are in the background, but I wouldn’t label them major factors at present”

Peregrine Treasury Solutions

Bianca Botes, corporate treasury manager, said risk-off sentiment in global markets is affecting the rand “Emerging markets as a whole have been under pressure, as investors flock to safer assets. In particular we have seen a move towards US Treasury bonds” “The pressure focusing particularly on South Africa, is a combination of both the current market environment as well as the flow of negative data released from the local economy over the course of the past week,” which highlighted the structural challenges the country is facing

Nedbank

The rand is a victim of global dollar-liquidity trends, said Mehul Daya, a strategist at the Johannesburg-based lender “The dollar is king” “It’s not about South Africa. There is a shortage of dollars because the Fed is draining liquidity through hikes and balance-sheet tapering”

Rand Merchant Bank

“Although there was broad-based weakness in EM, the rand was one of the worst-performing currencies, as peers raised interest rates and concerns around South Africa’s current account deficit grow,” Mpho Tsebe, an analyst at the Johannesburg-based lender, said in a note “At the same time, 1Q18 GDP figures and April’s manufacturing data were disappointing”

Standard Bank 

“The combination of local factors, contagion from other emerging markets and hawkish central bank sentiment is weighing on South African assets. Further, risk aversion could flare up given key events on the horizon,” Zaakirah Ismail, a strategist at Standard Bank, said in a note “First, there is this weekend’s G7 meeting in Quebec where trade policy is expected to be a topic of contention. Second, there is also the possibility of a more hawkish Fed next week especially given the strong US data recently. Lastly, there is the US-North Korea summit in Singapore on June 12”.

“EMs that have not fared well in terms of fundamentals, especially in a global context, would struggle if risk aversion flared up. South Africa’s current-account and budget deficits are still large in a global context, and growth continues lagging EM peers. We are therefore more cautious about the prospects for the rand and bond markets over the short term”
 
© 2018 Bloomberg

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