What to expect from the rand right now

The rand has continued to chip away at the dollar in recent sessions, with market concerns that the US Federal Reserve will slow the pace of its interest rate hikes, putting pressure on the greenback.

Reuters reported that the Fed raised interest rates by an expected 75 basis points last week Wednesday, but comments from chair Jerome Powell spurred hopes of a slower hiking path, impacting the dollar.

US House Speaker Nancy Pelosi is set to land in Taiwan on Tuesday and would be the highest-ranking American politician to visit in 25 years, Bloomberg reported. China views the island as its territory and has vowed an unspecified military response to any Pelosi visit.

“All eyes will be on China’s military to see how they react if Pelosi does indeed go to Taiwan,” Edward Moya, senior market analyst for the Americas at Oanda, wrote in a note.

Tensions between the US and China are exacerbating the geopolitical stress already buffeting markets from Russia’s war in Ukraine, said Bloomberg.

It added that investors are also keeping a wary eye out for more potentially hawkish comments from Federal Reserve officials about the need for higher interest rates to restrain elevated inflation. This is likely to keep the dollar under pressure, and could spark further recovery from the rand.

Locally, the weekend saw the outcomes of the ANC policy conference, with support for president Cyril Ramaphosa’s policies – including maintaining the step aside rule for those facing criminal charges – adding to some positivity for the rand. Support for the president’s reelection was also shown, said Annabel Bishop, chief economist at Investec.

“December, however, will see policies adopted, as well as the ANC presidential election, with Ramaphosa still seen as maintaining his position, which will create political noise. This weekend however did show Ramaphosa’s detractors did not see overall party support.”

Market-friendly policies benefit the domestic currency, the Investec economic lead said. However, the rand is still far from R14.40/USD in March this year, when the dollar was particularly weak, and there remain risk concerns, said Bishop.

The rand appears fundamentally undervalued, but recovery is likely to be slow, said economists at Absa in a recent note. “With the rand currently heavily oversold, inflation in South Africa below the US level and the SARB’s more hawkish stance, we believe the rand will end 2022 at R16.00/USD despite heightened global risk aversion.”

The economists said that Reserve Bank’s recent acceleration in monetary tightening should help to anchor inflation expectations over the medium term and support the currency. Thus, we believe that the rand has scope to recover to R16.50/USD by the end of Q3 22 and R16.00/USD by year-end.

It warned that less supportive trade inflows on the back of slowing global growth and/or any heightened political noise in the run-up to the ANC elective conference in December could hinder a more substantial recovery in the exchange rate.

Nedbank economist, Johannes Khosa, said in a note on Tuesday (2 August) that the rand is still very vulnerable to the upward march in US interest rates, the threat of a global economic downturn, and generally volatile global risk sentiment.

“Further risks to the outlook emanate from higher wage settlements as unions attempt to compensate for higher inflation,” he said.

Nedbank pointed out that the changes in interest rate differentials between South Africa and the US have dominated the rand’s movements since early March. In June and early July, a narrowing interest rate differential combined with the spike in load shedding and renewed political uncertainty pushed the rand to a much weaker R17.20 against a rampant US dollar.

“In the last two weeks of July, the rand pulled back to around R16.60 after the Reserve Bank surprised forecasters by matching the US Fed’s June rate hike of 75 bps. Subsequently, the US Fed raised its policy rates by a further 75 bps in late July, but the rand strengthened further despite the narrowing interest rate margin between the two countries,” said Khosa.

The boost came from a resurgence in risk appetites as market participants felt that the pace of US rate hikes will moderate as the US economy cools and possibly reverse if a recession ensues.

“The rand was probably also supported by the energy sector reforms announced by president Ramaphosa on 25 July, which could eliminate the energy shortage completely in the years ahead and raise South Africa’s potential growth rate materially,” said the economist.

The increasingly adverse global landscape and mounting unease ahead of the ANC’s elective conference in December are likely to weigh on the rand in the months ahead. “As a result, we expect more rounds of rand weakness during the remaining months of this year,” said Nedbank.

The rand was relatively flat against the dollar in mid-day trade on Tuesday, after recent gains against its US counterpart.

  • Dollar/Rand: R16.61 (0.02%)
  • Pound/Rand: R20.27  (0.34%)
  • Euro/Rand: R16.99  (0.23%)

Read: Economists on why the rand is so undervalued right now

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What to expect from the rand right now