Current account data means the rand is likely to remain weak and stoke inflationary pressures.
The rand slid 11% against the dollar last month, pushing its 14-day relative strength index to 86, above the 70 threshold that signals a currency has fallen too far, too fast. By that measure, it's the most oversold of the 16 major currencies tracked by Bloomberg. The rand also pushed through the upper limit of the Bollinger band, while its stochastic oscillator is at 86, implying an imminent reversal.
The currency of Africa's largest economy tumbled to a four-year low on May 31 amid concern union talks scheduled to start this month on wages will worsen unrest in the mining industry, which accounts for more than 50% of exports. The last time the rand's Relative Strength Index (RSI) was above 70 in late January, the rand proceeded to climb 4% over three weeks.
"History tells you it will probably get to a better level," Ion de Vleeschauwer, the Johannesburg-based chief dealer at Bidvest Bank – South Africa's biggest chain of money-changers – said on May 31. "It is stretched. Everybody's saying it, the central bank is saying it, market participants are saying it. We'll see a recovery, although it may still be a week or two away."
Movements in the currency are "somewhat exaggerated", central bank deputy governor Daniel Mminele told bankers in Pretoria on May 30. The rand will retrace losses "at some point", treasury director general Lungisa Fuzile said in an interview with Radio 702 the same day.
Big Mac
The rand slumped to 10.28 per dollar last week Friday, the lowest since March 2009. It fell the most last month of 24 emerging-market currencies tracked by Bloomberg and weakened versus all 16 most-traded currencies. The rand is 60% below fair value, based on the Economist Group's Big Mac Index. The currency gained 0.2% to 10.07 per dollar as of 7.16am in Johannesburg.
The rand has the second-highest Bollinger Band reading versus the dollar among European, Middle Eastern and African currencies tracked by Bloomberg after Russia's ruble. Bollinger bands, developed by John Bollinger in the 1980s, are used by technical analysts to identify the turning point in an asset's trajectory. The upper limit of the band represents two standard deviations from the 20-day moving average and typically implies that the likelihood of the currency dropping below the band is about 2.5%.
The stochastic oscillator for the rand versus the dollar passed through the 70 level that signals an imminent gain on May 20. The measure tracks the price of a currency relative to its highs and lows during a particular period.
In these and other forms of technical analysis, investors and analysts study charts of trading patterns and prices to predict changes in a currency, security or index.
The rand may extend its decline even as technical indicators show it's oversold, according to John Cairns, a currency strategist at FirstRand's Merchant Bank in Johannesburg.
"Sentiment is driving it now, not fundamentals or technicals," Cairns said by phone on May 31. "Rand weakness has gone far beyond what even the most negative local fundamentals can justify. But this doesn't in any way mean that the slide will end." The currency could fall to 13 per dollar "in a worst-case scenario", Cairns said.
Cairns is more pessimistic that the median estimate of 26 analysts surveyed by Bloomberg, who see the currency climbing to 9.06 per dollar by the fourth quarter.
Slower Growth
Last month's slump in the rand was spurred by slides in the prices of gold and platinum, metals that accounted for about 20% of South Africa's exports in 2012. Gold dropped 6%, following a 7.6% slump in April, and platinum declined 3.2%, according to data compiled by Bloomberg.
Labour unrest has also weighed on the currency after causing more than R15-billion in lost output and shaving 0.5 percentage point off gross domestic product (GDP) last year, according to the national treasury. GDP growth slowed to an annualised 0.9% in the first quarter from 2.1% in the previous three months, Statistics South Africa said last week.
President Jacob Zuma said on May 30 that he appointed a group of ministers to mediate between rival labour unions. The National Union of Mineworkers, historically the nation's largest labour group in the mining industry, supports Zuma's calls for stability, it said in a statement the following day. The Chamber of Mines, which represents mining companies, wants to reach an early, peaceful settlement that's fair for employees and mining companies, the Johannesburg-based organisation said on May 30.
"The sell-off has gone too far and the rand is undervalued" at around 10 per dollar, Bernd Berg, an emerging- market strategist at Credit Suisse AG in Zurich, said in a May 30 note. The rand could rebound to 9.5 over the next three months as the weaker currency boosts earnings for exporters, he said. "Past periods of significant rand volatility have shown that the rand tends to overshoot, but then rebound quickly." – Bloomberg