Rand on a winning run as interest rate cuts draw near
The rand temporarily pushed past one of its key resistance levels on Monday (26 August), breaking R17.70 to the dollar as markets responded well to indications from the US Fed that the next move for interest rates is down.
The positive market sentiment supporting the rand came from dovish comments by US Fed chair Jerome Powell at the Jackson Hole Symposium last week, where he stated that the time had come to cut rates.
“The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks,” he said.
According to Investec chief economist Annabel Bishop, Powell’s comments calmed markets, which saw the rand and other risk assets gain as risk aversion subsided.
Bishop noted that the chair’s comments “allow for a reassumption of risk taking, which could see the rand strengthen further this week. “
To date, the rand has averaged R18.19/USD, and the economist said the unit is expected to average R18.00/USD in Q3.
However, she cautioned that “volatility will always remain a risk for the domestic currency, particularly following weak US data prints”.
The rand pulled back into the R17.80/USD to R17.85/USD range on Monday, bouncing back from the R17.70/USD key resistance level—but it “could make further progress this week influenced by the outcome of the US core PCE inflation data,” Bishop said.
The greater confidence shown by the US monetary policy authorities in containing inflation has added to the positive sentiment. Therefore, markets continue to factor in a 25bp cut in September in the US.
For South Africa, expectations have also risen for a cut next month in the repo rate of 25 basis points.
Bishop noted that this has caused some rand weakness, as it would prevent a widening in the interest rate differential between South Africa and the United States.
“That is, when the US cuts its interest rates, without a cut in South Africa, the drop in US interest rates in comparison to our interest rates aids rand strength—meanwhile, a South African interest rate cut straight after the US FOMC meeting instead weakens the effect,” Bishop said.
Even though a rate cut at the same time as the US adds a little bit of pressure to the rand, it will likely come as a huge relief to households who have had to content with 15-year high rates for the past 16 months.
The current forecasts see a 25 basis point cut in September and another in November, with a total of 100-150 cuts ending in the middle of next year.
While this will bring relief to households, consumers have been warned that they need to keep a more realistic, ‘bigger picture’ view of the situation. Specifically, the fact that rate cuts are expected to terminate at a level higher than before the Covid-19 cuts.
Economists warned that, although lower borrowing costs could offer consumers some relief, interest rates are unlikely to return to levels seen at the start of the decade.
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