Rand takes a knock as interest rates look cloudy

 ·14 Nov 2023

The rand has weakened as hawkish comments by US Federal Reserve Chair Jerome Powell lifted the dollar and dented global risk appetite.

After running down to R18.15/USD early last week, the rand has weakened back to around R18.70/USD as global financial market risk aversion has risen on the back of Powell’s comments.

“U.S. inflation has come down over the past year but remains well above our 2% target. My colleagues and I are gratified by this progress but expect that the process of getting inflation sustainably down to 2% has a long way to go,” Powell said.

“We know that ongoing progress toward our goal is not assured: Inflation has given us a few head fakes. If it becomes appropriate to tighten policy further, we will not hesitate to do so,” he added.

Powell also noted that the Fed would continue to move carefully, however, allowing us to address both the risk of being misled by a few good months of data and the risk of overtightening, with the Fed seeking to dampen inflation expectations.

Prior to Powell’s speech, the rand had been tracking towards R18.00/USD last week and toward R19.50/EUR and R22.50/GBP, gaining against the crosses and driven both by USD weakness and ZAR strength.

According to Investec chief economist Annabel Bishop, the rand’s strength at the start of the month does indicate, however, that markets are ready to actively take risks when the path is seen to be clearer to the end of US interest rate hikes (which is likely close, if not already reached).

Although there is some optimism that the end of US interest rate hikes is near, the International Monetary Fund (IMF) warned that policymakers across advanced and emerging markets need to keep interest rates at current elevated levels until they’re sure inflation is under control despite sluggish growth – warning against premature celebration on inflation.

“The cost of underestimating inflation’s persistence could be painfully high and result in another painful round of rate hikes that could rob the economy of a large chunk of growth,” it said.

Bishop said that the rand will remain volatile, running stronger as market risk-taking rises and weakens as sentiment wanes, with the Fed careful to temper market, corporate and consumer enthusiasm, which could still place upward pressure on inflation.

Read: Interest rate expectations are shifting – as big risks linger

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