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Analysts braced for more volatility in the rand after the currency breached R18/$ for the first time on Monday as investors digested the implications of the country losing its last investment-grade rating.

This was despite the rand coming off its worst levels by the end of the day, while bonds, which bore the brunt of the negative sentiment last week, gained. The JSE gained with its global counterparts, which got support from US stimulus, lower oil prices and efforts to accelerate testing for coronavirus, which has brought the world economy almost to a halt.

“It’s been a day that’s been quite neutral,” said James Turp, Absa Asset Management portfolio manager. “There’s no real negative news” though the environment means “you need to be on the edge of your seat”.

The rand traded as weak as

R18.0863/$ and recovered to R17.9569/$ by 5.20pm, still 1.9% weaker on the day.

Moody’s Investors Service’s decision to downgrade SA, putting it on the same noninvestment grade as the other two major ratings companies, came after the markets closed on Friday. The agency also put SA on a negative outlook, meaning that it risks further downgrades, which may not have been expected by traders and which may have driven the initially sharp move above R18/$.

The rand’s initial tumble, which started as soon as trade resumed in Asia, could be a sign of further selling to come as foreign investors shed SA bonds due to them falling out of key indices they use for bench-marking.

That will lead to higher borrowing costs for the government, leaving it with fewer resources for initiatives to boost the economy or to spend on social services.

Junk status may weaken SA’s ability to attract long-term investors, exposing it more to speculative flows that can suddenly turn, prompting wider swings for what was already one of the most volatile major currencies. Foreign investors hold about 37%, or R800bn, of the local bond market.

“This move will threaten to weaken investor sentiment, meaning risks of both the currency and domestic stock market falling,” said Jameel Ahmad, FXTM global head of currency strategy and market research, who sees the rand heading for R20/$ as long as there is no solution to the Covid-19 crisis.

Monday’s moves pushed the rand’s 2020 losses to 22%. Among 24 emerging markets tracked by Bloomberg, only the currencies of Mexico and Russia, which are vulnerable to swings in oil prices, have fallen more.

Usually such a sharp drop in the rand, which would imply an increase in the price of imported goods, would raise concerns about the Reserve Bank’s ability to support the economy through easier monetary policy.

But a depressed global and local economy and oil prices slumping below $20 create a bigger risk of the Bank missing its 3%-6% target on the downside than up, which means that there is room for it to cut rates further, after reducing the repo rate this month by a bigger than expected 1 percentage point.

SA bonds were relatively calm on Monday.

Yields jumped to new records above 12% last week, prompting the Reserve Bank to step in with measures to support liquidity.

The yield on the R2030 was at 11.64%. It reached a record 12.38% last week, rising from less than 9% in February.

“We’ve seen buying from local and offshore real money clients post the downgrade,” said Rand Merchant fixed income analyst Michelle Wohlberg.

“A large portion of the downgrade seems to have been priced in already, so bonds should trade quite constructively.”

The JSE gained 1.1% while the S&P 500 in the US had gained 2.5% in afternoon trade.