Rand eyes R18.00 to the dollar as load shedding and rate uncertainty bite

 ·19 Sep 2022

The rand has come under immense pressure on Monday (19 September) as the country feels the pressure of stage 6 load shedding, and markets look ahead to interest rate hikes from major central banks.

TreasuryOne noted on Monday that the power crisis in South Africa has continued to worsen, with Eskom warning of “the risk of an unprecedented level of power outages,” which will likely weigh on the local currency in the week ahead.

Nedbank economists, meanwhile, said that the intensification of power cuts late in the week pushed the local currency to its weakest level against the US dollar since August 2020.

However, despite the impact of load shedding, the local currency is still being led by movements in major markets of the US and UK.

Nedbank said that the rand has been particularly hurt by global headwinds – with emerging market currencies dragged lower by US inflation data released on Wednesday (14 September), which pointed toward the US Federal Reserve hiking its policy interest rate aggressively at this week’s meeting.

“This week all eyes will be on US Fed’s policy meeting on Tuesday and Wednesday. The Fed has maintained its hawkish rhetoric over the past few weeks, with Chair, Jerome Powell, stating that the Fed is moving its policy stance purposefully to a level that will be sufficiently restrictive to move inflation to its 2% target,” Nedbank said.

The Fed is widely expected to hike interest rates by 75 bps on Wednesday. Meanwhile, The Bank of England will also hold its monetary policy meeting this week – given the upside risks to inflation, it is also expected to hike by 75 bps.

This view was echoed by Investec chief economist Isabelle Bishop, who said the rand is eyeing R18.00 to the dollar, feeding off this negative sentiment.

“Financial markets have started to factor in more than a 75bp hike in the US, which has negatively affected risk sentiment, causing the rand to weaken towards R18.00/USD on substantial US dollar strength, with the dollar breaching parity with the euro already in August,” she said.

Markets are increasingly concerned that the Fed’s tone may become even more hawkish, with the outside chance of a 100bp hike feared, she said.

“The US monetary policy decision…will lead the decision for South Africa’s interest rates at the Monetary Policy Committee meeting on 22nd September. South Africa is not expected to hike by more than the US, and this adds to rand weakness too.”

Bishop said that the coming Fed meeting would be key in determining the market going forward, as markets were hoping that the fourth quarter would begin seeing lower US rate hike moves.

“However, global financial markets are starting to re-evaluate their expectations, causing uncertainty to rise, negatively affecting risk assets as risk aversion increases. Volatility in emerging market currencies has increased over last week.”

A reduction in Fed hawkishness would reduce the risk-off environment somewhat, Bishop said, while more hawkish communications would increase risk aversion and cause risk assets to weaken further.

On Monday the rand was trading at the following levels against major currencies:

  • ZAR/USD: R17.77
  • ZAR/EUR: R17.75
  • ZAR/GBP: R20.22

Read: What to expect from South Africa’s interest rate hike this week

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