The South African currency dropped to 14.05 to the greenback on Thursday afternoon while braai fires across the country were being lit. At midday on Monday the rand was trading at around 13.93 to the dollar.
Warrick Butler, head of rand and emerging markets trading at Standard Bank, said the move of the currency was owed to the “horribly illiquid market” given the public holiday. Rand traders of old used to take advantage of the thin trade on South African public holidays in particular to try find where the next big orders are, Butler said.
For example, the desk at Standard Bank trades, on average, between $1-billion and $1.5-billion a day. “If you don’t have that in the market, the equity and bond markets have closed for the day, you just don’t have that natural international flow into the market,” he said.
So any sizable orders can potentially cause a weakening in the currency when there is zero liquidity in that market. While thin trade in the market may have pushed the currency to breaking point, its general and persistent weakness is predominately a function of offshore factors said Michael Keenan, South African strategist at Barclays Africa.
Weak emerging markets
The rand breached 12 to the dollar in the middle of the year and is yet to return to that level.
“The rand remains engulfed by two major international headwinds, namely ongoing evidence of hard landing in China and repeated suggestions from the US Federal Reserve that US interest rates are likely to start going up by year-end,” said Keenan. “The fact that the rand weakened so sharply during Thursday’s domestic public holiday serves as a reminder that most rand trading activity actually takes place outside our borders.”
The impact of Thursday’s holiday on trade was exacerbated by weakening in other emerging markets and headlines about the US Federal Reserve and imminent interest rate hikes. A statement from the Federal Reserve chair, Janet Yellen, on Thursday suggested interest rates could be hiked before year-end caused a strengthening in the dollar while currencies in developing nations took a hit. The MSCI Emerging Market dipped on the day.
In Mid-September the Turkish Lira too sank to historic lows against the dollar. And on Wednesday the Brazilian real dropped to its own historic low – before rallying on Thursday.
Last time the rand weakened past 14 to the dollar was in the early hours on the morning on Monday 24 August – the Asian trading time where in most parties who have rand commitments prefer to wait for the Johannesburg or even the London market to open because that is where the majority of liquidity is concentrated. There was no real market-shaping event to speak of then, but traders reasoned it was rather a matter of little liquidity in the market causing any large order to have a dramatic, although brief, impact.
Last time around, the Reserve Bank put out a release after the dip to register its concern about excessive volatility, but also to reaffirm its commitment to the exchange rate of the rand being set by market forces.
Its position, however, did not mean it was completely indifferent to exchange rate movements and, “In the event of developments that threaten the orderly functioning of markets or that may have financial stability implications, the SARB may consider becoming involved in foreign exchange markets to ensure orderly market conditions,” the bank stated. The Reserve Bank has not released a statement to respond to the historic low the currency experienced on Thursday.