The rand took a hammering on the markets yesterday, breaching the R18.50 mark to the dollar as the greenback strengthened on the back of an expected interest rate hike as US inflation remained elevated.
The annual inflation rate in the US slowed for the third month running to 8.2% in September, the lowest in seven months, compared with 8.3% in August, but above market forecasts of 8.1%.
As the latest US inflation print came in above expectations, investors feared this might fuel further hawkish rhetoric by US Federal Reserve officials to keep up with hefty rate increases.
This saw emerging markets currencies suffering losses in the financial markets yesterday, as these fears drove risk-averse investors to safer havens, with the dollar again approaching its highest levels in 20 years.
The rand weakened almost 1% to R18.53 to the dollar following the US inflation data, falling to almost a two-and-a-half-year low, close to levels not seen since May 2020.
The rand had already been dealt a blow by Wednesday’s US Federal Open Market Committee minutes, which revealed the escalation in the hawkish tone last month when members increased their interest rate hike forecasts in a firm focus on lowering inflation.
Analysts said the rand was at risk of further losses now, as the South African Reserve Bank (SARB) would take a cue from the Fed and increase interest rates significantly at its last meeting for the year next month.
To date, the US Fed has hiked rates by 300 basis points, while the SARB’s rate-hike cycle has encapsulated 275 basis points since it began in November 2021.
Investec chief economist Annabel Bishop said the SARB’s Monetary Policy Committee could hike interest rates by 100 basis points at its next meeting on 24 November, as inflation in South Africa was also still way above the SARB’s upper limit of its 3-6% target range.
Bishop said the erosion of the differential between US and South African interest rates also had a notable impact on the domestic currency, with South Africa now trailing behind the US and battling to catch up sufficiently for investors, as the US had been significantly quicker in its rate-hike cycle.
“That is, while a 100 basis points hike has become increasingly likely for SA for November, it is unlikely a 150 basis points lift would occur instead, and so SA will only be briefly in line with the US rate-hike cycle before December’s Federal Open Market Committee lift, with the latter providing an underpin for rand weakness,” Bishop said.
“SA’s high risk premium means its interest rates need to be substantially higher than that of the US, particularly in times of high financial market risk aversion, in order to attract investors, and this is unlikely in the remainder of this year, providing little impetus for rand strength.”
During an interview with CNBC yesterday, SARB governor Lesetja Kganyago signalled yet another rate hike, as the bank wants to see inflation decline firmly to within its 3%-6% target range.
Earlier in the week, Kganyago told international investors that the trajectory for inflation and its outlook remained highly uncertain, although there had been some cooling in energy and food prices over the past couple of weeks.
“From being in a position to cut rates deeply to support recovery, we are now in a very different environment,” he said.
“While it is the case that our inflation rate was fairly modest for a long time, it clearly has moved higher quickly, necessitating larger rate hikes to move out of an overly accommodative stance.”
Meanwhile, the JSE All Share index reversed early gains and fell as much as 1% to around 63 881 around 2pm, tracking its global peers as a stronger-than-expected US inflation print stoked worries about a more aggressive tightening by the US Fed.
BUSINESS REPORT