Global Courant 2023-05-09 12:21:23
The South African rand remains in a weak position ahead of a shift in global markets, said Annabel Bishop, Investec’s chief economist.
Despite a slight strengthening on Monday (May 8) amid a softer dollar, the local unit has been hovering around R18.30/USD for some time.
According to Bishop, the rand is looking for a “directional driver” as a risk averse environment persists in global financial markets, including emerging markets and currencies.
“Monetary policies globally also seem likely to diverge somewhat,” she said.
Financial markets have taken the latest rate hike by the US Federal Reserve as the high point for US interest rates for the current cycle. However, the Federal Open Market Committee (FOMC) has not been explicit or clear on this.
The European Central Bank (ECB), meanwhile, has said its recent hike is not the last of its cycle, with the bank’s president stating there is more ground to cover and that it is not pausing.
“The ECB benchmark deposit rate now stands at 3.25%, falling short of the rapid pace of US interest rate hikes, with a strong focus still on reducing inflation, and that this month’s rate hike does not would be the last of this year, despite monetary policy in ‘restrictive territory,'” Bishop said.
From a domestic perspective, a 25 basis point hike by the South African Reserve Bank (SARB) is fully passed on to the repo rate, with the next Monetary Policy Committee (MPC) announcement scheduled for late May.
Bishop said this still leaves some room for a repeat of the last MPC move when the SARB raised bank rates by 50 basis points.
As a result of the surprise increase, the country’s repo rate rose to 7.75%, pushing the prime lending rate to its highest level in 14 years at 11.25%.
Despite expectations that the SARB’s cycle of rate hikes would soon end, the central bank remained determined to contain inflation to bring it within the target range of 3% to 6%.
Recent CPI data showed that inflation rose to 7.1%, making it less likely that the SARB will cut rates in May.
Most analysts and researchers expect an increase of 25 basis points this month.
Interest rates compared
The US has raised interest rates by as much as 500 basis points in the current cycle, while South Africa has only increased by 425 basis points, Bishop said.
This causes the difference between South African and US interest rates to fall significantly during a risk averse period, weakening the rand.
“In a risk-free environment, South Africa should offer a higher risk premium to the rand, not a lower one, to keep the rand stable – but the erosion of the difference between South African and US rates has instead lowered the risk premium.” said Bishop.
“Therefore, it comes as no surprise that the rand has weakened significantly over the past 12 months of risk-off in global financial markets, from R14.50/USD to R18.50/USD, while the US dollar has strengthened and the rand increased. impaired.”
“The rand has also reached R20.43/EUR and R23.31/GBP in mid-April 2022, from 15.65/EUR and R18.77/GBP, with this broad edge weakness likely to add to inflationary pressures in South America. Africa if the pass-through effect has escalated,” Bishop said.
The rand is currently traded at:
R18.33/$ R20.15/€ R23.12/£
Read: Investors ignore South Africa
