The rand shed its weekend gains and eased by 0.2% to R18.30 against the dollar yesterday, as investors continued to assess the economic and monetary policy outlook amid concerns of further interest rate hikes by the US Federal Reserve.
The markets are pricing in higher chances of a 25 basis points hike in the Fed funds rate in May, as Fed officials called for further rate hikes in light of stubbornly high-core US inflation.
But there is hope that the softer-than-expected headline inflation numbers reinforced expectations that the Fed would soon end its rate-hike cycle.
This hawkish stance by the Fed has accelerated a risk-off sentiment against emerging markets’ currencies, driving the dollar stronger while investors look for safe havens.
The rand moved stronger last week, temporarily piercing the R18/$1 mark on Friday as expectations of sharp interest rate hikes in the US continued to fade.
The South African Reserve Bank might leave its benchmark lending rate unchanged at the highest level in more than a decade or hike borrowing costs further at its May meeting, after raising it by a larger-than-expected 50 bps to 7.75% in March, citing upside risks to the inflation outlook.
In particular, the bank noted food price inflation was rising much faster than their models suggested, at 14% year on year in February, amid the impact of severe power outages.
Investec chief economist Annabel Bishop said concerns over recession also built from April last year, increasing towards October. This added to the risk-averse global financial market environment, and emerging markets currency weakness, particularly for the rand.
Bishop also said the global economy had not weakened as much as was feared nor has the US economy in particular, which has also calmed market sentiment somewhat this year.
“The rand has weakened against the dollar this afternoon, after reaching R18.02/$1, rebuffed from the key resistance level of R18/$1, as the dollar regained some lost ground,” Bishop said.
“Looking forward, the direction of the rand will depend heavily on the movement of the dollar in the currency pair. A more definitive end to the US rates hike cycle would spur the rand’s strength against the dollar, although a May US hike is still a possibility.”
Meanwhile, the JSE All-Share index was little changed as it eased 0.2% to 78 723 points, as investors eyed economic data from major economies. Strength in tech stocks and resource-linked sectors was partly offset by losses in financials.
South Africa continues to experience load shedding at high levels, and some analysts warn the worst is yet to come, as winter approaches and demand is stronger.
Power utility Eskom announced yesterday that Stage 6 load shedding would be implemented indefinitely in spite of some generating units coming back online.
However, early on Tuesday the rand strengthened, reflecting a weaker dollar on global markets, before the release of a local business confidence index.
At 08:00, the rand traded at 18.2775 against the U.S. currency, 0.2% firmer than its previous close.
The South African Chamber of Commerce and Industry will release March and February business confidence figures at 11:30, giving more insight into private sector sentiment in Africa's most industrialised economy.
BUSINESS REPORT