Rand on the back foot as markets hold their breath

 ·3 May 2023

The rand remained on the back foot in early trade on Wednesday (3 May); however, there was little movement in the wider market as investors await decisions from the United States Federal Reserve.

According to Reuters analysis, bleak jobs data from the US put the dollar on the back foot before an anticipated interest rate announcement from the Fed that is poised to set the tone for markets globally.

The US Fed is expected to signal that it has ended its interest rate hike cycle or at least put it on pause for a significant amount of time to allow for the lagged effects of previous hikes to come through, said Annabel Bishop, chief economist at Investec.

“With around a two to three-quarter lag between interest rate hikes and the impact on the economy, the rapid US rate hike cycle over last year… has not fully reflected in the economic readings on activity, with a US recession still feared,” said Bishop.

The Fed is widely expected to raise interest rates by 25 basis points at the end of its meeting on Wednesday.

Bishop said there is a 30% chance factored in by the implied Fed funds futures for a further 25bp hike in US interest rates this quarter, and in H2.23, no interest rate hikes at all are anticipated by the markets, nor in January 2024.

“From July this year already markets think cuts in US interest rates would be more likely than hikes, while by November, a 25bp cut is fully factored in by the markets.”

Reuters added that no economic data releases are expected from South Africa today; as a result, it will reflect the moves of overseas markets.

Bishop said that the rand has largely been stagnant over the past week at around R18.30 to the dollar.

Since the beginning of the year, decisions from the Fed have led to rapid and often unpredictable fluctuations in the rand. These variations have primarily been based on a change in global risk appetite.

Adding to the uncertainty, the dollar has also been volatile over the last period. A weaker rand and more interest rate hikes in the US put the the South African Reserve Bank in a tougher position.

The latest interest rate hike in South Africa came in March when the SARB surprised the market with a 50 basis points hike, increasing the repo rate to 7.75% and the prime lending rate to a 14-year high of 11.25%.

SARB has remained steadfast in its goal of bringing inflation within its target range of 3% to 6%.

Many experts now predict a continuation of the hiking cycle and little relief for the rest of 2023, with the majority of analysts expecting a further 25 basis point hike.

On a domestic front, the usual suspects continue to shift the rand. Economists at Nedbank said that several factors impacting local markets include:

  • Lower GDP growth projections due to load shedding;
  • Corruption allegations at Eskom from its former CEO;
  • The Financial Action Task Force’s decision to greylist the country;
  • Poor Q4 2022 GDP results due to rolling blackouts;
  • S&P Global’s downgrade of the credit rating;
  • A disappointing cabinet reshuffle by President Cyril Ramaphosa increased the size of the cabinet earlier in the year.

The rand is currently trading at:

  • R18.44/$
  • R20.33/€
  • R23.04/£

Read: Another tough month for businesses in South Africa

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