The rand yesterday gave back most of this week's gains, falling near to another record high of R19.41 against the US dollar as the greenback strengthened on a possible solution to the US debt ceiling crisis and expectations of another rate hike.
Markets rallied overnight as optimism grew that the US may find a way to lift its debt ceiling and investors have remained focused on any signs of progress in US debt ceiling talks.
The stand-off between Democrats and Republicans is likely to be resolved before the crucial June 1 deadline and, if unresolved, could have serious consequences for the US and global economy.
Also, investors have reduced their bets on a potential pause in the US Federal Reserve’s interest rate hikes next month, with many now increasing their expectations of another rate increase.
Dallas Fed president Lorie Logan said yesterday that the latest data did not argue for a pause in rate hikes yet.
This as the rand has weakened to record highs, breaching the R19/$1 mark last week after the US ambassador to South Africa accused the country of selling weapons and ammunition to Russia in its war with Ukraine.
The announcement of Eskom’s winter plan yesterday, which showed that rotational power cuts could be ramped up to Stage 8 load shedding, also dampened sentiment towards the rand.
The SA Reserve Bank (SARB) is also expected to announce yet another interest rate hike of between 25 and 50 basis points next week as consumer inflation remains stubbornly above its target range of 3%-6%.
Anchor Capital’s co-chief investment officer, Nolan Wapenaar, said market participants were pushing the domestic currency one way at the moment as they wanted a weaker rand and a sizeable rate hike from the SARB.
“The currency is sentiment-driven, and sentiment towards SA is currently quite negative. The SARB is one of the few bastions of excellence left in the country, and we believe that a 0.5% rate hike will calm markets,” Wapenaar said.
“It is becoming increasingly expensive for traders to short the rand, meaning that short positions will likely be closed out soon, spurring some rand strength.
“The currency is significantly oversold, yet the negative sentiment will probably keep it that way for a while. Over the longer term, there are some prospects for a recovery of sorts, but over the short term it is difficult to see the rand trade much below its current levels.”
Investec chief economist Annabel Bishop concurred that the SARB could hike by as much as 50 basis points due to further upside risk to inflation forecasts as the rand has weakened significantly since the last meeting of the Monetary Policy Committee (MPC).
“We expect, on balance, that a 50 basis points hike is more likely for SA when the MPC meets next week, instead of a 25 bps lift, and the Forward Rate Agreement (FRA) curve having fully factored the larger 50bps hike in.
“South Africa’s FRA curve has factored in about a 50bps hike, as market certainty has grown over the month (as the rand has weakened) that the SARB will deliver another 50bps increase in the repo rate.”
BUSINESS REPORT