Why investors are steering clear of the rand
South Africa’s rand has been running softer in recent sessions as investors steer clear of risk.
Rand Merchant Bank said that renewed rand weakness over the past week had been driven by generalised weakness in emerging markets rather than anything South Africa-specific or broad-based dollar moves, reported Reuters.
On Tuesday (4 July), the rand was trading at R18.77 to the dollar, a generally weaker position than the R18.20 levels seen near the end of June.
Annabel Bishop, the chief economist at Investec, said that recent hawkish comments from the European Central Bank (ECB) regarding further interest rate hikes resulted in some emerging market currency weakness and US dollar strength.
Christine Lagarde, the president of the ECB, said that the bank is not seeing enough tangible evidence that underlying inflation, particularly in domestic prices, is stabilising and coming down.
This comes as the Bank of England Governor Andrew Bailey expressed concerns around inflation, especially core inflation, with tight labour markets and higher wages supporting inflationary pressures.
Jerome Powell, the head of the US Federal Reserve Bank, echoed these sentiments, noting that although monetary policy is restrictive – it may not be restrictive enough and has not been restrictive for long enough.
“Markets are increasingly factoring out expectations of further interest rate cuts in the remainder of this year, and instead looking at some additional hikes as Central Banks focus on bringing inflation back to targets,” Bishop said.
“The recalibration in market views has caused some subsidence of a modest build in risk-taking (risk-on), and a return to a more risk-averse environment in global financial markets, resulting in rand weakness and that of other emerging market currencies.”
Ultimately, global markets are seeing inflation remain sticky and persistent, pushing foreign investors away from emerging markets such as South Africa.
Governor of the South African Reserve Bank (SARB) Lesetja Kganyago has also weighed in on the sentiment, saying last week that there is no doubt that local monetary policy will remain tight for longer than the market had initially been pricing.
So far, the SARB has hiked rates in ten consecutive meetings, adding 475 basis points in the cycle, starting November 2021, as the fight against inflation continues.
The Bureau for Economic Research (BER) said that despite a hold on rates in the United States by the Fed, a 25 basis point hike is expected for the USA later this month, signalling that the fight against high levels of inflation is still on across the globe.
Some economists have noted the SARB’s hawkish tone and say the central bank would likely keep rate hikes going for at least one more meeting – likely one more 25 basis point hike in July.
The rand is currently trading at:
- R18.77/$
- R20.46/€
- R23.82/£
Loading ...