The rand fell to its lowest level against the dollar in four months yesterday on the back of fresh strength in the US dollar, as global oil prices soared.
Markets were concerned about the prospects of further interest rate hikes to curb the potentially rising inflation.
The local currency weakened by 0.8% to R19.35 against the greenback by lunchtime yesterday, its lowest since June 2, pressured by a stronger dollar and the rising fuel prices.
This US dollar hit a fresh 10-month high following ongoing strong US economic data, which supports the higher-for-longer interest rates narrative amid expectations that monetary policy will need to stay restrictive for "some time".
The dollar’s strength was further supported by Federal Reserve (Fed) chairman Jerome Powell’s hawkish view in Monday’s speech, which underscored the necessity for another potential rate hike this year and sustained restrictive monetary policy, if the Fed is to bring inflation down to its 2% target.
Interest rates were a key factor weighing on market sentiment in September as investors’ focus shifted from how much higher rates could go, to how long rates would remain elevated and how many cuts would eventually come.
The rand was further weakened by local fuel prices which rose for the third consecutive month, primarily driven by stronger international oil prices with Brent crude having breached the $90 mark in September for the first time in almost a year.
Additionally, the persistent power shortfall in South Africa and concerns over the nation's fiscal outlook continue to weigh on the domestic currency.
In particular, investors are concerned that the mid-term budget statement in early November will reveal a wider-than-expected deficit, amid dwindling tax revenue, rising debt costs, state-owned company bailouts and persistent power shortages.
TreasuryONE currency strategist Andre Cilliers said the stronger US dollar and risk aversion had resulted in the rand experiencing serious losses on Monday, with further weakness yesterday.
Cilliers said the local manufacturing data and new vehicle sales numbers for September also came out below expectations, reflecting the poor state of the local economy.
“The rand is not being helped by declining commodity prices either, and we could see further weakness in the short term,” Cilliers said.
“The surge in the dollar has seen commodity prices fall quite sharply across most markets. The oil price has also retreated further this morning, falling below $90 per barrel for Brent crude as the strong dollar and the prospect of higher rates in the US offset tight supply.”
Brent crude oil prices steadied below $91 per barrel yesterday after three consecutive sessions of losses amid a strong dollar.
However, the markets are looking ahead to an Opec+ meeting this week, where it is expected to maintain previously announced output cuts.
Brent crude oil recorded a fourth consecutive month-on-month gain, soaring by 9.7% on supply fears as two of the world’s largest oil producers, Russia and Saudi Arabia, have cut back on production and crude stocks at a key US storage hub fell to the lowest level in over a year.
The weakening of South Africa’s currency has raised concerns about the headline inflation outlook, after consumer prices gradually eased towards the SA Reserve Bank’s (SARB) midpoint of the target range in recent months.
Fuel and food prices tend to be the largest movers of consumer inflation in South Africa on a regular basis, with inflation the measure that the SARB targets in a 3-6% year-on-year range, but prefers inflation to average near the midpoint of 4.5%.
Investec chief economist Annabel Bishop said the rand’s weakness, coupled with elevated global oil prices, would negatively affect consumer prices and see inflation ticking up again towards the top end of the SARB’s target range.
Bishop said the moderation in global food prices has recently tended to be offset by the rand’s depreciation against the dollar, with worries over fiscal sustainability in South Africa as exported commodities prices have weakened this year.
“For South Africa, higher oil and petroleum product prices contribute significantly to higher inflation, with upwards movement in petrol prices since August adding to inflation rising in that month, along with base effects,” Bishop said.
“Higher fuel price increases in September and October will see inflation climb further, from 4.8% in August to potentially above 5.0% in September, with base effects having the potential to push it towards 5.5% by year end.”
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