Good news for the rand
The rand has started the week on a stronger footing against major currencies, but the news is bittersweet, as it comes amid market expectations of interest rate hikes on Thursday.
The rand strengthened against the US dollar, the euro, and the pound on Monday (25 May), now trading near R16.30/$.
According to Investec Chief Economist Annabel Bishop, the currency’s firm footing stems from market optimism that the United States and Iran are close to reaching a peace deal.
This has fed hopes that the Strait of Hormuz will be reopened. The strait has effectively been closed for months, raising global concerns about oil and product supply.
“While the blockade remains, preventing oil, petroleum products and other feedstocks from being exported, the more sober, orderly approach to the negotiations has eased some market concern,” Bishop said.
Bishop noted that, as a result, the US dollar has pulled back somewhat, strengthening the USD/ZAR exchange rate.
The rand’s strength on its own is minor, as evidenced by its movements against the euro and the pound, and is essentially flat on a trade-weighted basis, the economist noted.
However, the rand is also getting a boost from local market expectations—with economists now starting to price in an interest rate cut later this week.
The South African Reserve Bank (SARB) Monetary Policy Committee will meet this week, delivering the next rate move on Thursday (28 May).
Bishop said that the market views a 25bp rate cut this month as a 50/50 shot, but Investec sees the scales tipping towards a hike.
This position has also been expressed by other groups, such as Nedbank. Global banks, such as Bank of America, have been predicting an interest rate hike for a few weeks.
Bishop said that she believes the SARB will “act pre-emptively to stave off any second-round effects from becoming embedded in inflation”.
“The SARB has clearly indicated its concerns around the feed through of second-round effects and has highlighted the benefits of acting pre-emptively in quelling inflation,” she said.
This would shorten the ascent and the elevation in the inflation trajectory, she added.
“The SARB is very hawkish, and an earlier repo rate hike is now expected at this week’s MPC meeting. We changed our expectation to a 25bp rate hike this month on balance, instead of a delay until July.”
This position has strengthened the rand, as it would widen the rate differential between the US and South Africa.
Hike or hold
In the United States, recent releases showed further rises in its CPI and core CPI. This has seen markets also start pricing in at least one US interest rate hike by the end of the year.
Bishop noted that, although higher US interest rates tend to weaken the rand, with South Africa now expected to hike the repo rate this month, this is not feeding through.
If the MPC hikes rates as is now expected, it would take the repo rate back up to 7.00%. This is a stark turnaround from the start of the year, when markets were pricing in two or more rate cuts this year.
The property sector is anticipating the move but has called on Reserve Bank Governor Lesetja Kganyago to hold rates.
Samuel Seeff, chairman of the Seeff Property Group, appealed to the SARB to hold off on an interest rate hike this week, arguing that the inflation spike seen in April—and likely May—is temporary.
“The fuel price and inflation will come down again, and since inflation is only just at the upper end of the SARB’s new 3% target range [with 1pp flexibility], it leaves room for the bank to retain the rate unchanged,” he said.
Seeff said lower rates are critical for stability in the economy and property market.
Adding to his rationale, he highlighted that the rand has remained stable below R17.00 to the US Dollar, and that job and economic growth are at stake.
“Raising rates again would further hamper the economic recovery and punish consumers who are already burdened by the high interest rate,” he said.
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