Rand stays weak as markets wait for direction

 ·9 May 2023

South Africa’s rand remains in a weak position as it awaits a shift in global markets, says Investec chief economist Annabel Bishop.

Despite firming slightly on Monday (8 May) amid a softer dollar, the local unit has been sitting around R18.30/USD for some time.

According to Bishop, the rand is seeking a “directional driver” as a risk-averse environment persists in global financial markets, and so for emerging markets and currencies.

“Monetary policy globally is also seen to likely have some divergence,” she said.

Financial markets have taken the latest interest rate hike from the US Federal Reserve as the peak for US interest rates for the current cycle. The Federal Open Market Committee (FOMC) has not been explicit or clear on this, however.

The European Central Bank (ECB), meanwhile, has said that its recent hike is not the last of its cycle, with the president of the bank stating there is more ground to cover and it is not pausing.

“The benchmark deposit rate of the ECB is now at 3.25%, lagging the rapid pace of hikes in the US, with the focus firmly on subduing inflation still, and that this month’s hike would not be the last this year, despite monetary policy in ‘restrictive territory’,” Bishop said.

From a domestic perspective, a 25 basis point hike from the South African Reserve Bank (SARB) is fully factored in for the repo rate, with the next announcement from the Monetary Policy Committee (MPC) planned for the end of May.

Bishop said this still leaves some space for a repeat of the last MPC move when the SARB lifted its bank rate by 50 basis points.

As a result of the surprising hike, the country’s repo rate increased to 7.75%, leading to the prime lending rate reaching its highest level in 14 years at 11.25%.

Despite expectations that the SARB interest rate hike cycle would end soon, the central bank has remained determined to curb inflation to bring it within the target range of 3% to 6%.

Recent CPI data showed inflation rising to 7.1%, making it less likely that the SARB will ease rates in May.

Most analysts and researchers expect a further 25 basis point hike this month.

Interest rates compared

The US has hiked rates by a significant 500 basis points in its current cycle, whereas South Africa has only hiked by 425 basis points, Bishop said.

This causes the differential between South African and US interest rates to drop substantially during a risk-averse period, weakening the rand.

“In a risk-off environment, South Africa should offer a higher risk premium return on the rand, not a lower one, to keep the rand stable – but the erosion of the differential between South African and US rates has lowered the risk premium instead,” Bishop said.

“Consequently, it is no surprise that the rand has weakened substantially over the past twelve months of risk-off in global financial markets, from R14.50/USD to R18.50/USD, as the US dollar has strengthened and the rand has weakened.”

“The rand has also reached R20.43/EUR and R23.31/GBP, from 15.65/EUR and R18.77/GBP in mid-April 2022, with this broad-based rand weakness most likely to add to inflationary pressures in South Africa as the pass-through effect has escalated,” said Bishop.

The rand is currently trading at:

  • R18.33/$
  • R20.15/€
  • R23.12/£

Read: Investors are giving South Africa a skip

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