I wrote the following summary for the Világgazdaság on Monday 30 March. My articles here are always published with a one-day delay. Since than everyone’s focused in EURHUF on technical levels 370-375 by now. The exponential phase of currency crises is causing huge swings, even on an intraday basis. Rand and South African bonds are only one of the first dominoes right now, the question is whether panic or firefighters will be faster.
As for now, the weakening of the South African rand is only a possibile source of contagion, but as long as the emerging countrie’s downgrades continue, their currencies are at heightened risk.
In recent weeky, the currencies of some African countries have weakened to a greater extent in emerging market currencies. These currencies have lost their value even during the positive correction days of the last week, when MSCI’s emerging market currency index was able to rise. African foreign exchange rates depend on commodity exports, and interest rate cuts by local central banks. Also the dwindling of reserves of commercial banks reduce demand of the local currency and bonds. The movement of Kenyan shillings, Angolan kwanza and Zambian kwacha has little effect on the world’s capital markets. However, there is a currency, the South African rand, whose near-exponential weakening threatens other emerging market instruments, including the forint.
The rand, which has been already in a weakening trend, had entered an exponential trajectory due to the effects of the coronal virus epidemic. Another wave of sales followed on Friday, when Moody’s, the country’s last keeper in the investment category, said it was downgrading the country’s rating to junk category, assigning a Ba1 rating to its credit rating. The associated negative outlook indicates the chance of further downgrade. In addition to the deterioration in economic and borrowing opportunities, this also means that South African assets will be removed from the FTSE’s global bond index at the end of April at the latest. South African bonds have so far been in USD 3 trillion worth of funds, according to Bloomberg calculations. The FTSE index holders were able to give a month’s reprieve by postponing the index’s reweighting date, but let’s face it, it’s only going to prolong the panic sales. More about this:
https://www.fin24.com/Economy/heres-how-much-a-downgrade-to-junk-will-cost-south-africa-20200331
After all, it is no surprise that the Finance Minister, Tito Mboweni, has said that they will seek the support of the World Bank and the International Monetary Fund if necessary. For the first time in history, the currency has crossed the level 18 against the dollar, with the yield on 10-year government bonds issued in dollars trading now around 8.15 percent, a 735 basis point premium to US government bonds. The local index of bank shares tumbled 12 per cent on Friday, followed by a further fall of 6 per cent by midday yesterday. While the rest of the equity market is more likely to have a temporary relief effect that a weakening currency is helping exports, analysts say this won’t last long.
The rand has also in the past caused a wave of fire sales in other emerging markets without a direct economic link between the countries. The best-known example of the contagion in the capital markets was the weakening of Thai baht in 1997, which generated worldwide emerging market panic and spread to our region as well. For the time being, the weakening of the rand or other emerging country’s currency, which is also facing a downgrade, is only a risk of infection.
Risk-averse behaviour also weakens the region’s currencies, which also explains the fact that the forint is once again testing the weaker side of the trading range. According to Equilor’s note, the weakening of the euro-forint exchange rate may continue after surpassing the level of 355. The next important resistance is at 360, but according to the current technical picture, a much more significant forint weakening is possible. The target price of the drawn triangle shape point to a range between 370 and 375.
