The rand plunged to a three-week low yesterday on the back of market inertia as traders track US political developments while local investors also keenly awaited consumer inflation data in South Africa.
The domestic currency remained in a tight range yesterday, falling by 1% to trade at R18.43 against the US dollar, its lowest since July 3, disrupting the strengthening momentum since the SA Reserve Bank’s (SARB) hawkishness last week as it indicated that it could hike interest rates at the next monetary policy committee meeting in September.
The Bank of America forecasts an interest cut in the US in September, but the SARB is unlikely to do anything before the US Federal Reserve acts.
The rand has weakened from R14.50/$1 in early 2022, to R20.00/$1in 2023, but pulled back to towards R18.00/$1 on the end of the US rate hike cycle, and then the expectation of US interest rate cuts, to near R17.80/$1 momentarily.
Consumer price inflation in South Africa is projected to have eased to 5.1% in June when measured on a year-on-year basis, from 5.2% previously, after petrol and diesel prices decreased by more than R1.00 per litre respectively in June, supported by a stronger domestic currency and largely contained global oil price.
Anchor Capital portfolio manager Martin Smith said there were a couple of things driving the sell-off sentiment against the rand.
“So one, I think the broader kind of global investor base is looking to the South African government to actually start putting the rand on the board and start to move things in a positive direction from a growth perspective. So I think they are adopting a bit of a wait-and-see approach from that perspective,” Smith said.
“You’ve also got what’s happening with interest rates, both locally and abroad, and how that’s gonna affect the rand and the dollar. The dollar has been basically bulletproof for the better part of the last two years or so. If you see a weaker dollar, that will obviously feed into the rand doing a little bit better.
“And I think just global sentiment, you’ve seen a bit of a flight back to kind of the dollar and to bigger mega caps there. So you’ve got sentiment that needs to change, the weaker dollar needs to come into play and then we need to see what South Africa does on a more medium-term basis.”
Meanwhile, US President Joe Biden’s sudden withdrawal from the presidential race has left significant uncertainty in the markets as to whether his vice-president, Kamala Harris, can defeat Donald Trump at the polls, though she has secured enough delegates for the Democratic nomination.
Andre Cilliers, currency strategist at TreasuryONE, said the uncertain US political landscape in the wake of Biden’s withdrawal from the presidential race has seen currency markets trade sideways for now.
“Short-term moves are still being dictated by the rate-cut hopes, which keep dollar strength in check. Traders are keeping an eye on this week’s US PCE price index data for confirmation of moderation in US inflation.
“Emerging markets and risk-sensitive currencies like the rand continue to trade on the back foot against the major currencies as weak Chinese economic data and the US-China trade war concerns weigh on risk sentiment. Traders are awaiting this week’s local inflation numbers for hints about when the SARB might consider cutting interest rates.”