Rand slides on COVID variant fears

The South African Rand has faced significant turbulence in the wake of reports of a new coronavirus variant in Southern Africa, leading to a sharp depreciation against major currencies. James Turp, Fixed Income Head at ABSA Asset Management, shed light on the currency's reaction and the ensuing market uncertainty. Turp highlighted the unpredictability and risk aversion currently plaguing the market as investors grapple with the implications of the new variant. The Rand breached 16 Rand to the Dollar amidst the turmoil, signaling a volatile period for the currency. As global markets reel from the news, the Rand's trajectory remains uncertain, with analysts treading cautiously in their assessments. Turp noted that market sentiment favors certainty, a luxury currently absent in light of the virus-related developments. The Rand's weakening mirrors a broader sell-off of risk assets, reminiscent of the early days of the COVID-19 pandemic. Turp pointed out that the market's aversion to uncertainty has triggered panic selling across all asset classes, intensifying the currency's descent. While attempting to gauge the Rand's fair value amid the storm, Turp emphasized the challenging nature of predicting its trajectory. Technical analysis suggests an overextended decline, warranting a potential pullback. However, the evolving situation surrounding the virus complicates any definitive forecasts. Market participants had initially forecasted levels around 15.20-15.25 for year-end, but the current turbulence necessitates a reevaluation of such projections. Turning to the bond market, Turp dissected the impact of the crisis on bond yields, noting a flattening yield curve and increased risk premiums. The uncertainty surrounding South Africa's economic outlook, including weakened third-quarter growth and potential tourism setbacks, casts doubt on interest rate hikes in the near term. Turp alluded to the Reserve Bank's recent rate hike stance and the challenges posed by the current environment. As the central bank navigates the delicate balance between inflation and economic growth, the specter of a rate hike in January appears less likely. Despite the tumultuous landscape, Turp identified opportunities in short-end bonds, citing value in light of discounted rate hikes. While acknowledging the volatility of the market, he underscored the importance of careful investment decisions amidst the evolving crisis. As South Africa grapples with the repercussions of the new variant, market participants remain on edge, awaiting clarity on the currency's path forward.