As expectations grow that US interest rates may still climb much higher, the rand is trading below R18/$ for the first time in over three months.
After trading around R17.50 just a week ago, the local currency fell to R18.06/$ on Monday morning. Under R16.70, it began the year.
Rand crashes through R18/$
It was speculated last week that the US Fed might raise rates even further in order to cool inflation following last week’s strong employment data. In an AFP report, Federal Reserve officials were reported as saying that they still had plenty of work to do before they were satisfied that prices had been controlled.
“CMC Markets’ Michael Hewson said the comments were particularly noteworthy since they explicitly disputed market expectations for rate cuts by year end.”
It is now nerve-wracking for the markets to wait for Tuesday’s release of US inflation data for January.
“When inflation readings come in below expectations, investors may become optimistic about a ‘soft landing,’ according to Stephen Innes, chief investment officer at SPI Asset Management.
AFP report
In a recent report, AFP reported that some economists predict rates could move to six percent from current levels of 4.50 to 4.75 percent. Load shedding has contributed to the local economy faltering, which means the SA Reserve Bank has less scope to raise rates.
South Africa, foreign investors
The rand suffers from this. In South Africa, foreign investors on the hunt for good returns will lose interest in the rand and local assets if the interest rate is not raised in line with the US. For the rand to remain stable, foreign inflows are crucial.
It appears likely that South Africa will slip relative to other emerging economies in 2023 in terms of growth, current account, budget balance, and real policy rates, says Peter Worthington, senior economist at Absa CIB. Due to persistent load shedding and other infrastructure constraints, South Africa may face difficulty attracting capital inflows.”
Foreigners sold South African bonds and equities in large numbers last week, according to data from the Johannesburg Stock Exchange.