The rand rallied to its highest in six weeks yesterday as the dollar fell to a one-month low after economic indicators in the US showed that inflation was peaking.
The domestic currency strengthened to R16.14 against the US dollar by 5pm, from the previous close of R16.60 as slowing fuel and food prices indicate the possibility that the US Federal Reserve (Fed) will slow down its aggressive policy tightening plans.
This comes as the annual consumer price inflation (CPI) rate in the US slowed more than expected to 8.5 percent in July year-on-year, from a more than 40-year high of 9.1 percent hit in June.
This was amidst a significant drop in fuel prices, also ending a 16-month streak of month-on-month gains in prices.
Fuel price increases declined from 59.9 percent in June to 44 percent in July as supply-chain constraints eased in oil-producing countries while the US ramped up its production.
Core inflation, which excludes food and energy prices, was steady at 5.9 percent, beating expectations of 6.1 percent, and offering some support that inflation has finally peaked.
The markets are now pricing in a 50 basis points hike at the US central bank’s next policy meeting in September to a range of 2.75-3.0 percent, instead of the previously expected 75 basis points.
Citadel Global director Bianca Botes said the slowing of inflation in the US would be positive for emerging market currencies like the rand.
“The rand rallied nearly 1.5 percent following the release of the US CPI data today,” Botes said.
“US (core) inflation came in at 5.9 percent year on year, prompting markets to position for a slower pace of hikes by the Fed. This bodes well for the rand, benefiting from a softer dollar.”
In China, inflation rose by less than expected to 2.7 percent in July from 2.5 percent in June, and compared with market forecasts of 2.9 percent.
This cooling-off of prices in developed markets and the downtick in the dollar have raised hopes that the South African Reserve Bank (SARB) could also slow its hiking cycle.
The SARB raised the key repo rate by more than expected 75 basis points last month and signalled further aggressive monetary tightening ahead to tame the surging domestic inflation.
Inflation topped 7.4 percent in June, the highest since May 2009.
There are already indications of price easing at the pumps as economists expect a large fuel price cut of between R2.42 and R2.72 per litre in September due to softening global oil prices to ease pressure on household finances and cool inflation.
Investec chief economist Annabel Bishop said falling food and energy prices since the end of the second quarter had contributed to a moderation in commodity prices overall in the month.
“Fuel prices could be flattish to slightly lower in the third quarter versus the second quarter, depending on the actual price changes at the pump, as fuel prices in SA remain state administered prices.
“‘The petrol price is running at R25.42/litre in August and the diesel price at R24.52/litre, versus R18.30/litre and R15.64/litre in the respective months in 2021.
“Lower international gasoline prices, if sustained, will have an impact on the likely outcome for SA’s CPI inflation rate for 2022, potentially moving it towards 6.6 percent from a previous expectation of 6.9 percent, if September sees the large fuel prices currently scheduled.”
BUSINESS REPORT