The rand is expected to be beaten by global markets in the coming months as inflationary and interest rate pressures from central banks in the US and the European Union continue to dominate global market movements.
The European Central Bank (ECB) raised interest rates by an unprecedented 75 basis points (bps) last week, raising the likelihood of a larger-than-expected increase from the South African Reserve Bank later this month.
On the same day as the ECB statement, Federal Reserve Chairman Jerome Powell stressed that the Fed must act “forcefully,” which further cemented market expectations of a third consecutive 75-point hike in US policy rates. base at the end of this month.
Annabel Bishop, Investec’s chief economist, said the markets will react directly to the US CPI figures coming this week, affecting the US dollar and thus the rand.
“Currently, the Fed Funds futures rate shows that a 73bp hike is being considered by the markets at this month’s FOMC meeting on Sept. 21, essentially accounting for a 75bp move,” he said. .
The rand will take direction from this and is likely to fluctuate, increasingly weaker, for the remainder of this month and into the fourth quarter of the year, maintaining a high sensitivity to all US inflation data, he said.
“Market expectations for the US interest rate move in September are fluctuating, closer to between 50bps and 75bps at the start of the month, and a lower than expected CPI could see the market shift its hike forecast. rates closer to 50bps if that occurs, “he said.
In this case, the rand could see further strength against the greenback as the US dollar weakens further, but this short-term volatility is likely to be ignored by the US PPI coming out higher than expected over the course of the week. or any subsequent inflation indicator.
“Volatility is likely to persist for the rand against the US dollar, while it has experienced greater stability against the GBP and EUR. However, on Q4.22, it could see a more fundamental strengthening, approaching R16.00 / USD instead of R17.00 / USD, ”Bishop said.
The economist said the rand could strengthen in the short term, but any gains are likely to be temporary as local issues such as persistent load shedding continue to drag sentiment.
“Overall, the rand is still very weak, far from fair value and still reflects an environment of high risk aversion, despite some volatility,” he said.
Impact on interest rates
The Bureau for Economic Research said the rand is likely to remain under pressure, affecting the SARB’s interest rate print at the end of the month.
“The rand did not hit multi-year lows, but it remained under pressure this week. Although often at the whim of global market movements, the SA current account unexpectedly returned to deficit territory and removed a major recent support for the rand, “BER said.
A softer lead is one of the key factors likely to push interest rates higher at the September meeting, adding that his projections from the upside have moved from a 50bps hike to 75bps.
Nedbank economic data also attributed the rand’s unstable ground to the current account deficit and eased risk appetite amid persistent global growth concerns and speculation about the magnitude of US interest rate hikes.
He recently noted that the market forces at play have shown that the underlying global state does not support the outlook for the rand and other emerging market currencies.
However, local issues have also played a significant role – mainly burden reduction – while political uncertainty fuels risk-away behaviors.
Nedbank noted that the rand has come under persistent pressure over the past three months, with the sharpest depreciation occurring against the rampant US dollar, which has reigned supreme in global markets, bolstered by the Fed’s aggressive rate hikes and its rhetoric. hawk.
He said the odds are likely to remain stacked against the rand for the next year and a half, with the group’s model aiming for a monthly average of R17.14 for September, dropping to around R17.00 by the end of the year. .
On Monday afternoon, the rand was trading at the following levels against the major currencies:
- Dollar / Rand: R17.10 (-2.25%)
Pounds / Rand: R20.00 (-0.78%)
Euro / Rand: R17.30 (-1.20%)
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