The Indian rupee and the South African rand fell to fresh lows against the US dollar as emerging market currencies struggled against investor appetite for the US dollar – the currency of choice amid the coronavirus uncertainty.
Since February 23, the Indian rupee is down 6.36 per cent to 76.4456 against the greenback at 4pm UAE time on Monday, while the South African rand slumped about 15 per cent to 17.75, a near record low for the currency.
"The panic flight-to-safety is driving the headwinds in the rupee and rand against the US dollar," Ipek Ozkardeskaya, a senior analyst at Swissquote Bank, told The National.
“Both currencies have the potential to fall towards unprecedented levels in the coming weeks. The USD/INR will likely continue its rise towards the 80 [rupee] mark, while in USD/ZAR, the 2016 peak could be cleared and encourage a further run towards the 20 [rand] psychological resistance.”
Investors have started another dramatic week, as they digest slashed economic forecasts, the struggles of European countries to curb the pandemic and warnings of a global recession.
“There is absolute mayhem in the markets with global financial institutions liquidating their holdings in even low-risk assets like treasuries and US municipal bonds to meet their requirement for cash,” said Devesh Mamtani, president – investment and advisory (financial markets) at Century Financial.
“In terms of percentage, US benchmark 10-year and 30-year bond yields have posted their biggest jumps since 1982 during one of the trading sessions last week."
As a result, emerging market assets and currencies are not expected to fare well, with the rupee and rand hit hard as investors flock towards the US dollar, considered the world's most liquid currency and the safe haven of choice when confidence evaporates from financial markets.
“There is a general US dollar-run across the emerging market currencies but also across equities, bonds, developed markets, currencies and commodities,” said Ms Ozkardeskaya. “Everyone seeks the protection of the US dollar right now … no matter what you trade and how you trade, the US dollar is where the ultimate refuge is."
Indian assets experienced a rough start to the week when stocks extended declines after Prime Minister Narendra Modi imposed an almost-complete lockdown across the country. This is expected to worsen an economy already set to slow to an 11-year low as its lenders were facing a grueling credit crisis. The central bank, due to decide on interest rates on April 3, is injecting both rupee- and dollar-liquidity, which could cause the rupee to depreciate further, said Mr Mamtani.
The South African rand, meanwhile, has fallen by almost 20 per cent this year, with foreign investors pulling more than $4 billion out its stock and local-currency bond markets, said Charles-Henry Monchau, chief investment officer and head of investments at Al Mal Capital, a subsidiary of Dubai Investments.
"The outlook for the rand is bleak," he said. "South Africa is already in recession and the fallout from business disruption due to coronavirus crisis will be significant." The country's economy may shrink 2 per cent in real terms this year, Mr Monchau added.
Mr Mamtani advises UAE residents from India and South Africa earning in dirhams to "hold on … until the current turmoil ends".
Meanwhile, the British pound weakened on Monday, heading back towards the 35-year lows seen last week when investors rushed to buy the US dollar amid another round of panic about the economic hit from the pandemic.
The pound was also hit by investor concerns over Britain's slow response to the crisis, despite several policy interventions. The Bank of England slashed interest rates to record lows, ramped up its quantitative easing programme and the government announced significant fiscal stimulus.
"The broken financial environment means that GBP is not able to respond to the proactive fiscal support undertaken by UK policymakers," ING analysts said in a research note.
In times like these “cash is king and the dollar is king of cash”, said Jasper Lawler, head of research at London Capital Group
“We think the selling of sterling has stopped only temporally, even at 35-year lows," he added. "People are panic buying leaving shelves empty because they can see the UK looks like it’s headed for lockdown and without a trade deal in sight.”
The euro is also still under pressure, with the EUR/USD pairing extending losses to $1.0635 in the overnight trading session.
"The massive inflows into the US dollar and expectation of cataclysmic PMI figures could encourage a further sell-off towards the €1.05 mark," added Ms Ozkardeskaya.