The rand has seen substantially less volatility this year despite the oil-price shock, Middle East war and changes at the US Fed.
Image: ChatGPT
The South African rand was trading at around R16.16 by mid-morning on Tuesday, having weakened after a speech by US Fed chairman Kevin Warsh raised expectations of a US interest rate hike.
This tends to make dollar-denominated assets more attractive while reducing the appeal of riskier emerging-market assets and currencies such as the rand.
Investec chief economist Annabel Bishop said the rand weakened from below the R16 mark to R16.19 on Friday as markets initially interpreted Warsh’s comments as hawkish, before recovering to R16.12 on Monday afternoon.
The probability of a 0.25 percentage point US rate hike in September initially jumped to 61% from 43%, strengthening expectations of higher rates across the spectrum, said Bishop. However, she said markets subsequently digested the speech and viewed it as less hawkish than their initial reaction suggested.
Warsh said, “inflation expectations… right now… are well anchored. But they must be closely minded. It's the Fed's job to make sure that inflation expectations do not get unanchored.”
The Fed chairman also noted that medium-term measures of inflation expectations were largely stable.
Bishop said the message was not one of an urgent need for higher US interest rates, with Warsh deliberately avoiding giving markets forward guidance on rate moves.
“His [Warsh’s] speech was not particularly hawkish taken in total, despite strong reference for the need for low inflation, and as such there is not likely to be a prolonged market reaction to the speech,” she said.
The rand’s movements also indicate that the pressure has largely come from a stronger dollar rather than broad weakness in the South African currency.
Bishop said the rand had not weakened notably against the pound or euro. TreasuryONE currency strategist Andre Cilliers similarly noted on Tuesday morning that the rand was firmer against both currencies, despite lower precious metals prices, higher oil prices and increased geopolitical risks.
By Tuesday morning, markets were pricing in a 57% probability of a US rate hike this month, said Cilliers.
Higher US rates tend to draw investors towards dollar assets, while periods of heightened global uncertainty can amplify that move as investors seek safer assets and reduce their exposure to riskier emerging markets.
Cilliers said both forces were currently supporting the dollar.
“The higher interest rate outlook and safe-haven demand due to the escalating geopolitical risks are supporting the Dollar for now, with the DXY index holding near the 99.40 level,” he said.
Trading Economics similarly attributed pressure on the rand to a firmer dollar and weaker precious metals following Warsh’s comments, while renewed US-Iran strikes weighed on risk sentiment and pushed oil prices higher.
Bishop said the rand’s weakness had been relatively limited compared with the currency’s historical volatility.
The rand has seen substantially less volatility this year despite the oil-price shock, Middle East war and changes at the US Fed, she said, adding that it was likely to strengthen further.
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