The South African rand reached a welcomed six-week high on Thursday (30 March) after the South African Reserve Bank (SARB) raised interest rates by 50 basis points – higher than expectations.
According to Nasdaq, the currency strengthened as much as R17.75 against the dollar, touching its highest level since mid-February and was last up 1.6%.
“The rand is a short-term beneficiary of the surprise decision to hike rates more than was anticipated,” said Shaun Murison, senior market analyst at IG in South Africa.
“However, while we are seeing some short-term strength, the longer-term trend for the domestic currency remains that of depreciation and its fate will largely be dictated by global risk on risk off scenarios and their effects on key export commodity pricing as well.”
Nebank’s latest Rand Dynamic report said that the rand was put on firmer ground following the latest rate hike following relentless pressure caused by a dire domestic front, including load shedding slashing growth prospects, the country’s greylisting and a credit rating downgrade.
The bank noted that in the short-term, the rand is expected to remain in unfavourable territory, with global risk appetite staying volatile and weak as investors scrutinise news on the US and other banks, waiting for Federal Reserve interest rates to peak and pivot.
Despite this, Nedbank expects the rand to recover better than originally expected towards the end of the year when inflation recedes and, ultimately, growth expectations improve.
The rand is at the whim of both global and domestic forces. Global inflation is, to a large degree, out of the control of monetary policy, the national government and other factors; however, domestic forces can be altered to a certain degree.
In terms of the domestic landscape, Nedbank said that it had been a turbulent start of the year for the rand – falling under severe pressure during January and February. The banking group said the major triggers for the rand were mainly ‘homegrown’.
Nedbank listed the following domestic knocks to the rand:
- Fading growth prospects in the face of load sheddingleading to GDP growth forecasts across the board by the SARB, the Treasury, all three major rating agencies and the IMF
- Explosive revelations of former Eskom CEO Andre De Ruyter of government involvement in corruption at the embattled power utility
- The greylisting by the Financial Action Task Forcewhich triggered significant capital outflows from the equity market
- A disappointing set of Q4 2022 GDP numbers reflecting the impact of rolling blackouts
- S&P Global’s downgrade of the country’s credit rating from positive to neutral
- An underwhelming cabinet reshuffle from President Cyril Ramaphosa expanded an already bloated cabinet.
“The barrage of bad news completely erased the modest gains that followed this year’s National Budget, in which the government stuck to its ambitious deficit reduction plan and offered Eskom substantial debt relief to remove over 60% of the utility’s debt from its balance sheet,” Nedbank said.
The table below outlines the current market conditions faced by the rand as well as the severity of each factor’s impact on the domestic currency:
Hungry for risk
Broadly speaking on global influences on the domestic currency, the US dollar and recent decisions from the Federal Reserve have led to fast fluctuations in the rand, driven primarily on the basis of changes in global risk appetite.
For example, the recent failure of three mid-sized US regional banks and the collapse and sale of Swiss Bank Credit Suisse spiked risk aversion and fueled a selloff of risky asset classes. Nedbank said that following this, a calm returned after relevant authorities took measures to inject liquidity and safeguard deposits.
“As risk aversion among international investors eased, the rand recovered marginally against a weaker US dollar,” Nedbank said.
According to Investec’s chief economist Annabel Bishop, market caution and risk aversion limits potential gains for the rand.
Nedbank said the US dollar – to which the rand is tied – has been volatile since the start of the year.
“This volatility stemmed from wild swings in risk appetites based on rapidly changing market expectations on the future course of US interest rates. The confusion stems from the difference in the views of investors and the US Fed on the underlying stickiness of inflation and the economy’s strength.”
“Most investors believe US interest rates are restrictive enough to cool the economy and the labour market sufficiently to force inflation down towards the central bank’s 2% target over the next 12-18 months. However, the Fed has consistently struck a more hawkish tone, citing evidence of sticky inflation outcomes and a still robust labour market over January and February,” the bank added.
When looking at the rand’s performance this year so far, the picture is bleak, with it making considerable losses against major currencies, as shown below:
The rand is currently trading at:
- R17.72/$
- R19.29/€
- R21.94/£
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