Rand gets a major boost from the United States
The rand has experienced another wave of strengthening against the US dollar after minutes from the Federal Open Market Committee (FOMC) meeting put the greenback on edge.
The rand was trading around R16.10/$ on Thursday (20 August), down from R16.25/$ earlier in the week. It is currently trading at its strongest levels since the US-Iran War erupted at the end of February.
According to Investec Chief Economist, Annabel Bishop, the FOMC minutes showed that the US Fed views the inflation outlook in the world’s largest economy as highly uncertain, with risks to the upside.
This led to the Fed holding US interest rates in July, with the prospect of future rate hikes waning.
This, in turn, weakened the dollar, boosting the rand and pushing it closer to the R16/$ resistance level it hasn’t been able to cross since February.
“With fewer members than feared voting for a hike in the high inflationary environment, financial markets reacted positively to the minutes, on balance,” Bishop said.
Supporting the view of no interest rate hike was the fact that US business contacts judged that consumers would resist further price increases.
“With the FOMC minutes positioning a less hawkish stance than previously, and with a large, detailed quantity of information…financial markets [became more] risk-on.”
The latest wave of rand strength follows a winning streak of sorts for the currency, which had weakened when the South African Reserve Bank (SARB) held local rates at the end of July.
The SARB shocked markets at its last meeting by voting to hold rates when most economists and analysts anticipated a 25 basis point hike.
This caused the rand to weaken by more than 2% against the dollar immediately after the decision, where it traded at R16.98/$.
However, this path was reversed soon after, when the US Fed announced a pause in interest rate hikes.
This was followed by a shocking reversal in US job numbers, which experts said would make further hikes difficult to justify.
Interest rate hikes in South Africa still on the cards
Interest rate hikes in South Africa tend to strengthen the rand with immediate effect and weaken it if they do not occur as expected, as happened in South Africa’s financial markets in July.
US rate hikes also weaken the rand, making the hold positive for South Africa.
Markets are now looking ahead, with inflation numbers and rate hike prospects being key considerations.
While the rate-hike picture is waning in the US, Bishop previously noted that a 25bp hike remains fully factored in for December in South Africa.
This is also in the context of inflation likely to tick higher in August and September due to elevated fuel prices.
Stats SA on Wednesday announced a cooler inflation print of 4.3% y/y, down from 5.0% y/y in June. This was driven by fuel price cuts in the month.
However, diesel prices were hiked in August, with both petrol and diesel facing another sharp hike in September, which Bishop noted could push headline inflation back up to 5.0%.
The SARB is targeting a 3% inflation rate. It will announce its next policy move in September, with economists currently expecting another hold—with the final November decision still up in the air.
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