Here’s what to expect from the rand

The rand gained further ground against a weaker dollar in morning trade on Tuesday (4 October) as it searches for any meaningful direction on either side of the R18.00 mark.
Treasury One said in a morning note that the dollar retreated further overnight after weak ISM manufacturing PMI and employment data out on Monday.
“Fears of another 75 bps rate hike by the Fed eased slightly, and US Treasury yields fell quite sharply. The dollar was also pushed back by the pound, climbing to above 1.1300 after the UK Government reversed its tax cut plans yesterday,” the financial services group said.
The rand closed 1.26% stronger at R17.84 on Monday on the back of the softer dollar and is currently sitting a touch firmer at R17.74 as risk sentiment also improves slightly. A break below R17.70 is possible in the short term, it said in its daily market report.
Bianca Botes, director at Citadel Global, noted that Britain’s partial scrapping of its controversial tax-cut plan improved global market sentiment, at least temporarily, and bonds and the pound rallied.
“The dollar also lost some support as Treasury yields slumped. US economic data showed a slowdown in manufacturing, hinting that the aggressive Fed rate hikes are already being felt.
“The rand benefitted from the dip in the dollar’s value and gained back some lost ground, but is still hovering around the R18.00/$ mark.”
In mid-morning trade, the rand was at the following levels against the major currencies:
- Dollar/Rand: R17.74
- Pound/Rand: R20.21
- Euro/Rand: R17.52
Annabel Bishop, chief economist at Investec said that with the rand attempting to settle around R18.00 against the dollar, markets await new direction as the next FOMC meeting only occurs in November, currently factoring in less than a 75bp hike for November (66bp currently), and close to 50bp in December (46bp).
“The US’s interest rate hike cycle has been unusually fast and substantial, purposely so in order to attempt to quell high inflation and inflation expectations, although markets have expected that the size of the US rate hikes could reduce in Q4.22,” the economist said.
“A week ago, the implied Fed funds futures were factoring in a 70bp lift in November, higher than current market expectations, and for December 48.5%, also higher than currently for the end of the year, as market expectations have slipped somewhat over the past week.”
However, Bishop said that the rand has not gained from the easing over the past week in markets expectations on future US interest rate hikes, with the rand averaging R18.03/USD last week versus R17.73/USD a week prior.
“The rand has also lost ground as Eskom continues to face unresolved difficulties in increasing the availability of electricity in the face of vandalism, theft and sabotage of its infrastructure and electricity generation capacity, on old poorly maintained, or poorly built power stations,” said Bishop.
“The newly reconfigured Eskom board did not spark rand strength, as the deep-rooted problems in SA’s energy production sector are not quick or easy to resolve, but will instead take many years to repair, resolve and bolster domestic production capacity,” the economic lead said.
Bishop also pointed to declining terms of trade since March as trade dynamics weakened into Q2.22 and over Q3.22, lowering economic growth expectations amid expected slowing global growth.
“The long lead time to the advent of global recession has caused a prolonged and worsening period of risk aversion, with this market risk-off, in particular, the driver of rand weakness and USD strength, and which is not expected to ease in the near term.
“While markets are factoring in a slowing in US interest rate hikes, risk aversion is at such high levels of elevation that this has not caused a calming effect, with the focus on recession risk and its particularly slow approach, in turn exacerbating risk aversion even further,” said Bishop.
Absa said in a morning note that since April, the rand has fallen victim to heightened levels of global risk aversion, broad-based USD strength and softer commodity prices.
Absa said that it believes that a lot of bearishness is already priced into the exchange rate, “given that all three of our valuation models imply that the ZAR is oversold”.
“Therefore, we believe the ZAR can recover to R16.75/USD by year-end – previous: R16.00 – and R16.00/USD by Q1 23 – previous: R15.80.”
Markets will look out for Friday’s US non-farm payroll data for any changes to the labour landscape, said Treasury One.
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