Moody’s downgraded the South Africa

What’s going on?

Moody’s downgraded the country to ‘junk’ status on Friday. It sent the country’s CDS up 31 basis points to 439 on Monday, data from IHS Markit showed. The country was stripped of its last remaining investment grade rating. In fact, South Africa’s economy collapsed before the coronavirus outbreak.

Consequences

South Africa’s 5-year credit default swaps - used by investors to insure against a government debt default - jumped to their highest level since 2009. As a result, it will fall out of the FTSE World Government Bond Index after April, which could prompt significant capital outflows. Moreover, it will also surge borrowing costs, and that will make it even more difficult for the government to close the budget gap.

What does it mean?

Let’s look at the chart below that represents USD/ZAR exchange rate monthly. The rand fell to a record low of 17.9630. The direction of USD/ZAR is skewed to the upside. It may reach 18.0000 mark and break above previous 2016 high of 17.7840. On the downside, USD/ZAR remains supported above 15.3750, which marks the 61.8% Fibonacci retracement.

south africa usd zar - south african rand