Emerging market currencies ended the week with a brutal selloff across the board, and the South African rand was not immune to this. Turkey is mired in one of the worst currency routs in emerging-market history, with few signs of how it will end. The lira fell as much as 17% on Friday, capping the biggest slump since the country’s banking crisis in 2001, and is down nearly 30% since President Recep Tayyip Erdogan was returned to office with sweeping new powers in late June.

The rand slumped by more than 2.5%, on Friday, breaching R14/$ to reach a low of R14.09 against the US dollar. The currency lost about 5.6% in value for the week. This is a combination of emerging market fears and a stronger US dollar. The rand traded 3.88% weaker against the pound and 4.23% weaker against the euro.

Local equity markets performed steady against the backdrop of negative sentiment in emerging markets. The all-share index (ALSI) was pushed upwards by rand-hedged shares to close the week 1.03% higher. Resources shares closed 2.79% higher, while industrials closed 2.04% up. However, financial shares and specifically the banking sector lost 2.92% following fears of higher inflation because of a weaker currency.

Internationally, the US put in place tariffs on an additional $16 billion in mainly Chinese industrial goods, bringing to $50 billion the total volume of imports from China subject to the new 25% levies. China quickly matched the US action as the country’s state media highlighted China’s readiness for a protracted trade war with the US.

The European Central Bank (ECB) is concerned about the impact the Turkish crisis could have on European banks. The currency crisis has raised concerns among regulators that several large European lenders are overly exposed to Turkey. As is often the case, Turkish borrowers have significant exposure to debt denominated in euros and dollars, which means their ability to pay back these debts erodes as the lira falls.

This week, local and international markets will put a close watch on Turkey and the actions their government will take to address the country’s political and financial crises. 

* The rand weakend to R14.50 at 10:00 Monday morning.

Regards,

SECURITAS – Wealth Management